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The FCA review on challenger banks – key takeaways

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An FCA-conducted review has found that challenger banks will need to improve the ways in which they tackle financial crime risk, even as they gain approval for other parts of their operations. In this review, it was discovered that many of these banks are failing to check their customers’ incomes and occupations to an adequate level. In some instances, these challenger banks did not have sufficient crime risk assessments in place for their customers in the first place. 

Following this review, it can be expected that the FCA will be taking steps to ensure improvements are made to ensure a reduction and prevention of financial crime at these institutions. It is important that the UK remains a safe place for all to do business, and changes such as these are a vital part of fostering a positive environment for everyone. 

What is a challenger bank? 

Challenger banks have grown in popularity in the UK in the past few years. They are smaller retail banks that have often been created recently, and they have been designed to compete directly with the more-established banks of the British markets. 

Such challenger banks want to directly compete with the big banks by offering modern solutions where the traditional banks might fail. These banks often exist solely online or through an app rather than having a branch or retail front that customers can turn to for advice and service. 

There are, of course, benefits to choosing to do business in this way. Challenger banks are available to all who have access to a smartphone. They have tried to make it as easy as possible for consumers to open an account, even with the need for verification checks and other important KYC factors. 

What the banks are doing right 

Challenger banks have only been around for a little over 10 years, something that the FCA recognises. However, this does mean that they need to quickly be able to implement the level of customer care that is required of them, especially for an area that is as important as crime risk assessment. 

The FCA chose to focus their study on the newer banks who chose to actively deliver a quick and easy application process, meaning that they ended up covering 6 challenger banks. This covered over 8 million customers, a sizeable amount so it is important that the correct level of customer care is indeed in place.  

The review did uncover that there were some good practices in place. There were plenty of examples of innovative technology in use that helped to identify and verify the customers using these apps and did so at speed. This is the type of innovation that we need to see in the banking industry in the UK and, ultimately, it seems like the challenger banks are leading the way. They are creating high-speed and easy-to-implement applications which means that customers can get signed up in a flash.  

The FCA very much recognizes that challenger banks are part of the evolving UK banking scene. The services that they are able to offer are filling gaps in the market that many of the traditional banks, such as the Big 4, are failing to meet. 

What challenger banks need to address 

The FCA report did uncover that some of these challenger banks did not have adequate checks in place when it came to financial crime monitoring. Yes, it is important, that these banks are able to offer an easy signup process, especially if they have no in-store support that a customer could fall back on if required. 

However, this is no excuse for not having robust financial crime controls in place. There needs to be a balance established between the speed at which a customer can open an account, and the checks being performed to ensure that all processes handled by the bank are subject to the same high level of checks as any that would be expected at one of the traditional high street banks. There is a risk that those wishing to bypass financial crime checks could begin to use challenger banks unless these institutions step up and ensure that they have concrete checks in place.  

It is recommended that all challenger banks, whether they were the focus of the FCA review or not, should consider what was discovered and what they can do to enhance their own financial crime systems. In doing so, they can help to create a more diverse and interesting market that continues to evolve at the same rate as the digital banking age. 

Any firms who wish to analyse and improve their own financial crime controls should get in touch with Neopay today. Our expert compliance consultants can perform an audit of your current systems and then work with you on an ongoing basis to ensure that you always meet the correct standards. 

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