The UK Financial Conduct Authority’s (FCA) recently published the results of a review of financial crime controls at challenger banks, which concluded “much more needs to be done overall to ensure that all firms in the challenger banks sector are identifying and appropriately managing financial crime risk.”
In this blog we explore some ways for challenger banks to adapt their approach to address four key challenge areas identified by the FCA.
1. Improve customer risk assessments
The FCA requires the firms they regulate to have systems and controls to identify, assess, monitor and manage money laundering risk. Firms must ensure they identify and collect the relevant information needed to have a complete picture of all the financial crime risks associated with each customer relationship.
Yet, at some challenger banks, the FCA found customer risk assessment frameworks that were either absent or not well developed. Shortcomings in customer risk assessments ultimately reduced the effectiveness of transaction monitoring, one of the core components in any anti-money laundering (AML) system
What to look for in a financial crime risk solution
A system that can produce a comprehensive and up-to-date understanding of customers and clients, using data from a wide range of sources, is integral for assessing a customer’s risk and determining if their risk score is within the range dictated by the firm’s risk policy and appetite.
An evaluation of customer risk must be based on actual behaviour and not just expected behaviour, so customer risk levels must be continuously reviewed. A cycle of ongoing reviews will achieve a dynamic risk understanding, whereby any increase in risk can be further investigated, and transaction monitoring and screening rules can be adjusted as necessary.
Napier’s Client Activity Review enables ongoing risk-assessment. It collates transaction data and customer profile data from Know Your Customer (KYC) onboarding systems into a single, easy-to-use dashboard to help analysts detect suspicious financial behaviour and measure risk - not just at a snapshot in time but across the entire lifecycle of the relationship.
2. How challenger banks can transform customer due diligence
As explained above, all regulated firms, including challenger banks, must ensure they identify and collect the relevant information needed to have a complete picture of all the financial crime risks associated with the customer.
However, the FCA found that most challengers did not obtain all the customer information needed to determine risk. Some failed to have the required customer due diligence procedures at onboarding, and there was evidence of inconsistent enhanced due diligence lacking any formal procedure. Without an appropriate understanding of risk, it’s not possible to respond effectively and proportionately.
Assessing customer risk
To accurately measure exposure to financial crime risk and detect suspicious behaviour, all sets of customer-related data must be brought together to assess customer risk levels, including transaction data and customer profile data from KYC onboarding systems.
Napier’s Risk-based Scorecard helps financial institutions to streamline their risk assessment processes by providing accurate, dynamic risk calculation and scoring the customers.
3. How challenger banks can enhance transaction monitoring with AI
The FCA requires adequate resources to be in place to consider customers’ activity holistically, as part of transaction monitoring alert reviews.
Yet, despite this requirement, the FCA uncovered several areas of inadequate transaction monitoring alert handling at the challenger banks assessed, including:
- A lack of basic information recorded in the investigation notes
- A lack of holistic reviews of the alerts
- Transaction monitoring alerts not being reviewed in a timely manner due to inadequate resources
- Inconsistent and inadequate rationale for discounting alerts by alert handlers
Why reducing false positive alert rates is important
Key to an effective transaction monitoring system is its ability to digest multiple sources of data to achieve a holistic, 360-degree view of a customer and related risk.
False positive alerts resulting from inadequate rules present a huge issue in transaction monitoring. Consequently, rules and thresholds need to be finetuned constantly to avoid generating large volumes of poor matches that require manual review by analysts.
Further enhancing your transaction monitoring system with artificial intelligence (AI) can help reduce the number of alerts requiring investigation too. The outcomes derived from AI can also contribute to building a deeper understanding of complex criminal typologies. This efficiency enables analysts to focus on results and where risk is most likely to come from.
Napier’s Transaction Monitoring provides a systematic, intelligent review of up to 100’s of millions of transactions with ease. It’s integrated Sandbox offers a rapid build-and-deploy environment for testing new rules.
4. How challenger banks can revamp SAR submissions
It is a legal obligation for the nominated compliance officer at FCA regulated firms to report any knowledge or suspicions of money laundering to the National Crime Agency (NCA) by filing a Suspicious Activity Report (SAR). SARs are also known as Suspicious Transaction Reports (STR) or Suspicious Matter Reports (SMR).
However, the FCA found that the quality of SARs submitted by some challenger banks needed to improve. Examples of poor practice include:
- Untimely reporting following delayed reviews of transaction monitoring alerts arising from inadequate resources in place
- Providing a lot of transactional data without clarifying why it is suspicious
- Not being specific enough about the circumstances that gave rise to a suspicion of money laundering
How technology can make submitting SARs easier
Filing SARs is widely regarded as the cause of considerable financial and human resource challenges for regulated entities and enforcement agencies. However, technologies are available that can make it more straightforward to gather all the data needed and deliver substantial internal efficiencies.
In the UK, digital transformation is also being drivenby the NCA and the Government’s Economic Crime Plan which aims to to improve the quality and ease of SAR submission, with new capabilities such as bulk reporting. Moreover, the NCA has promised that the IT transformation project will focus on delivering “a more reliable digital service with an improved user interface.”
Napier’s Suspicious Transaction Report Builder can facilitate faster, safer filing of STRs that are of a higher quality and fully compliant with global regulatory requirements. The STR Builder helps compliance teams collate data- up to 80% completed automatically- to build and submit high-quality reports to enforcement agencies, securely and on time.
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