Digital banks showing weaknesses in their financial crime defenses, UK regulator warns

Date: April 22, 2022

 

News Author(s): Ryan Browne
Photo Credit: Adrian Dennis | AFP via Getty Images
Source: cnbc.com

 

Britain’s online-only challenger banks need to do more to prevent the abuse of their platforms by criminals, regulators have warned.

The Financial Conduct Authority on Friday published the findings of a review into financial crime controls at several U.K. challenger banks — younger banks set up with the aim of taking on incumbent lenders.

The FCA didn’t name any firms but said its review focused on six challenger banks, half of which were digital banks. Starling Bank said it was one of the lenders scrutinized by the regulator.

“Starling has been extremely vocal in raising awareness on these matters and in January this year announced that we would no longer be advertising on Meta platforms,” a Starling spokesperson told CNBC.

The regulator said it found weaknesses in challenger banks’ due diligence checks on customers, with some firms failing to adequately assess the risk of financial crime when onboarding new clients. In some cases, challenger banks did not have customer risk assessments in place to begin with, it added.

Collectively, the companies reviewed by the FCA “covered over 8 million customers,” the watchdog said. The review excluded e-money issuers and payment services providers, like Revolut and Wise.

“Challenger banks are an important part of the UK’s retail banking offering,” Sarah Pritchard, executive director of markets at the FCA, said in a statement Friday.

“However, there cannot be a trade-off between quick and easy account opening and robust financial crime controls. Challenger banks should consider the findings of this review and continue enhancing their own financial crime systems to prevent harm.”

Fintech firms are under pressure to improve their financial crime controls, particularly in the wake of economic sanctions imposed on Russia over its unprovoked invasion of Ukraine.

Fintech-friendly regulations in the U.K. have allowed numerous upstart lenders including Monzo and Starling to flourish. But there’s been growing concern from regulators that some of these newer entrants may have more lax controls than those of established banks, given their platforms are designed to make applying for an account or loan faster and easier.

Going forward, the FCA said it expects challenger banks to develop their defenses against financial crime to reflect their user growth, and adapt their due diligence measures to take the heightened risk of sanctions evasion into account.

Last year, the popular app-based bank Monzo disclosed an investigation by the FCA into potential breaches of anti-money laundering laws. At the time, the firm said the probe was “at an early stage,” and that it’s cooperating with the regulator.

 

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