Finance regulator identifies challenger bank financial crime weaknesses

Challenger banks need to do more to stem potential use of their platforms to commit financial crimes, says the Financial Conduct Authority (FCA).

The UK finance regulator has found that some challenger banks are failing to check customer details properly, with some having no financial crime risk assessments.

In a review of challenger banks, including digital banks, the FCA found a rise in suspicious activity reports, which it said raised “concerns about the adequacy of these banks’ checks when taking on new customers”.

Challenger banks, many of which are app-based, are attractive to customers because of their user-friendly services, including offering new customers easy sign-up. But despite its concerns, the FCA said there was evidence of good practice with the use of tech to identify and verify customers quickly.

Sarah Pritchard, executive director, markets at the FCA, said the regulator’s three-year strategy highlights its commitment to reducing and preventing financial crime. “This is important in creating that confidence for consumers and market participants in financial services and in demonstrating that the UK is a safe place to do business,” she 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. Challenger banks should consider the findings of this review and continue enhancing their own financial crime systems to prevent harm.”

Money laundering, and its links to organised crime, is a serious global problem in which banks find themselves at the centre. According to the UN, up to $2tn is moved illegally each year, with criminals using banks to hide money. In the UK, the National Crime Agency (NCA) estimates that money laundering costs the country’s economy £24bn a year.

To counter this, banks need to understand the customers they are dealing with before providing services.

German digital challenger bank N26 was recently banned from onboarding new customers to its Italian business following an inspection of anti-money laundering (AML) controls.

Italy’s central bank said it “adopted a measure banning the Italian branch of N26 Bank from undertaking operations with new customers and from offering new products and services to existing customers (ie cryptoassets)”.

The decision followed an on-site inspection late last year which revealed “significant shortcomings in respect of anti-money laundering legislation”.

The Berlin-headquartered challenger bank was founded in 2013 and has previously faced sanctions over its anti-money laundering controls. Last September, it was fined €4.25m by the German financial services regulator, BaFin, for weak AML practices.