A group of the UK’s top challenger banks have left themselves vulnerable to terrorist financing, money laundering and fraud due to weak financial controls, the city watchdog has warned.
In a fresh report released today, the Financial Conduct Authority said that six UK challenger banks were conducting lacklustre checks when taking on customers, including failing to verify customers’ income and occupation, which were opening the door to financial crime.
Challenger banks like Monzo and Starling have snapped up huge customer numbers in the past ten years with smarter digital offerings for customers and more up-to-date IT systems.
But the unnamed group of banks called out in the report, primarily consisting of digital banks with a customer base of eight million, have fallen short on customer protection, the FCA said.
“Challenger banks are an important part of the UK’s retail banking offering. However, there cannot be a trade-off between quick and easy account opening and robust financial crime controls,” Sarah Pritchard, Executive Director, Markets at the FCA said.
“Challenger banks should consider the findings of this review and continue enhancing their own financial crime systems to prevent harm.”
Light-touch checks and fast track customer onboarding were potentially exposing the firms to money laundering and terrorist financing, the FCA warned.
The scathing report follows warnings in 2020 from the National Risk Assessment of money laundering and terrorist financing (NRA) that criminals may exploit fast onboarding processes when setting up “money mule” networks, which are used to launder cash payments between criminals.
The NRA warnings spurred the watchdog to conduct a review of systems in 2021 which identified a spike in the number of Suspicious Activity Reports reported by challenger banks.
The banks have now been urged by the FCA to tighten due diligence processes and customer risk assessments, as well as ensuring they adapt to the fresh risk of sanctions evasion.
Head of regulatory affairs at anti-fraud software firm Encompass, Dr Henry Balani, said compliance processes at challenger banks had not always kept pace with their rapid growth.
“Dealing with increased volumes of customers and transactions while expanding into new markets has added complexity to anti-financial crime initiatives,” he said.
“Challenger banks have a reputation for being digitally advanced, but the need to maintain high levels of customer growth, while managing increasing financial crime risks, requires continued innovation.”