On 22 April 2022, the FCA published its findings following a multi-firm review into the financial crime controls at challenger banks.

The review was conducted in 2021, predating the significant expansion of sanctions against Russia. Although the FCA’s focus on sanctions was limited, the main financial crime and money laundering controls it assessed equally apply to firms’ management of sanctions, specifically in respect of the risk that firms are utilised for sanctions evasion.

Key findings of the review included:

  • While some evidence of good practice was observed more needs to be done by the challenger bank sector as a whole. For example, in some challenger banks the FCA found that the customer risk assessment framework was not well developed and lacked sufficient detail.
  • Some challenger banks were not consistently applying enhanced due diligence and were not documenting it as a formal procedure to apply in higher risk circumstances, for example when managing politically exposed persons. Also, some challenger banks failed to have the required customer due diligence procedures at the customer on-boarding stage, instead relying on their transaction monitoring systems to identify higher risk customers. Furthermore, the FCA found inadequate handling of transaction monitoring alerts, including inconsistent and inadequate rationale for discounting alerts by alert handlers.
  • The FCA found weaknesses in the effective management of financial crime change programmes. This included inadequate oversight and a lack of pace of implementation which meant that the challenger banks’ control frameworks were not able to keep up with changes to the business models.
  • The FCA expects financial crime control resources, processes and technology to be commensurate with a bank’s expansion. Challenger banks should apply a risk-based approach to anti-money laundering controls and also continuously make sure their financial crime controls remain fit for purpose as their business develops and grows.