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The Consumer Duty: How AI in client screening ensures resiliency

By meeting the needs of the Consumer Duty, financial institutions can not only achieve compliance, but ensure resiliency.

Catherine Havasi
November 29, 2023

In the fast-evolving landscape of financial institutions, staying compliant with regulatory changes is a never-ending challenge. As a response to the need for good financial products and services in the UK, the Financial Conduct Authority (FCA) introduced the Consumer Duty, which came into force in July 2023. It ensures that financial institutions provide accessible information to enable consumer understanding of well-valued products that meet their needs, with support to solve problems effectively.  

By meeting the needs of the Consumer Duty, financial institutions can not only achieve compliance, but ensure resiliency. Over the past year, we've witnessed high-profile financial institutions facing periods of uncertainty. Regulatory compliance is not just about adherence; it is essential for national security and consumer satisfaction.  

What does the Duty mean for financial institutions?

The consumer duty represents a significant shift, both for financial services firms and the FCA. Coming at a challenging time for the economy, the Consumer Duty outlines a more trustworthy and fair service requirement for consumers and small businesses. The new regulation promises a growth and innovation boost in the financial industry and in turn, the UK economy.

One of the key areas where consumer duty impacts financial institutions is client screening and customer due diligence. In the age of rapidly changing sanctions and evolving global events, the speed and scale at which Know Your Customer (KYC) is conducted has never been more critical.  

Amid ongoing conflict in Ukraine, in late October, we recently witnessed another batch of sanctions imposed from the US and FinCen on entities like Hamas and Russia. Swift onboarding processes can reduce the impact on customers when dealing with sanctions. For example, after Russia's invasion of Ukraine, many oligarchs were swiftly added to sanctions lists. However, traditional, less AI-driven KYC techniques can take a long time to update, which poses a resiliency issue for financial institutions.  

AI as the pathway to resiliency

AI risk-scoring is a game-changer. Implementing AI-powered risk scoring systems can assist financial institutions in their KYC and screening processes, allowing them to respond faster to emerging global news and changes in sanctions. This enables institutions to answer the crucial ‘why’ behind a flagged transaction or client, and with more accurate results. In a world where every data point matters, staying ahead of risks and understanding the nuances of customer profiles is essential.

Relying on unproven, unexplainable AI exposes institutions to uncertainty. The consumer duty necessitates that we understand, and can explain, the AI-driven insights used in the decisions we make as experts. The recent case in the UK with politician Nigel Farage's account being closed with little explanation serves as a prime example of the need for transparency and understanding. This raises the important question of how we define and treat Politically Exposed Persons (PEPs) within our KYC and screening processes. Do we treat them all equally, and what are the implications for consumer due diligence?

What can the rest of the world learn from the UK’s Consumer Duty?

On the global stage, the influence of major players can impact smaller community banks. Maintaining a level playing field for both large and small financial institutions is crucial for customer trust and market competition. The Consumer Duty levels the playing field for smaller firms, making the market more competitive, and in turn, better for consumers.

Globally, by implementing more advanced AI and machine learning tools, financial institutions can improve the services they provide to consumers and small businesses. These technologies can process vast amounts of information rapidly, leading to increased customer satisfaction and trust.  

It's worth noting that around 2-5% of customers get stuck in the KYC and onboarding process. Many of those customers ultimately decide to leave the bank and seek another financial institution to work with. This not only affects the organisation's bottom line, but also the consumer's experience. Getting caught in a false positive KYC or screening loop can be frustrating, but with more advanced AI and ML, we can minimise these issues.

In a world of ever-evolving regulations and global events, the path to success for financial institutions lies in embracing advanced technology while upholding the values of compliance, transparency, and customer-centricity. The Consumer Duty is the new standard, and it's an opportunity for financial institutions to adopt emerging technology for consumer benefit.

Join us for our upcoming webinar in collaboration with Babel Street, ‘The Consumer Duty - Ensuring Financial Resilience through AI in Client Screening’.

Photo by Samuel Regan-Asante on Unsplash

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