The UK regulator is increasingly paying attention to the newer market entrants, struggling to get to grips with ever-changing compliance requirements in a rapidly innovating market. Specifically, the FCA has concerns that not all of the challenger banks are doing enough to fight financial crime. The FCA found that challenger banks need to improve how they assess financial crime risk, with some failing to adequately check their customers’ income and occupation. In some instances, challenger banks did not have financial crime risk assessments in place for their customers.
For example, when it comes to onboarding new customers, the FCA warns that there cannot be a ‘trade-off’ between signing up new customers and the checks that all banks need to do.
The FCA notes that there has been a rise in instances when challenger banks send a report to the regulator concerning suspicious behaviour by customers. But the quality of these reports, on occasions, is poor. Some of the reports merely narrate transactions without explaining why they are suspicious. And worse, the FCA reportedly noted that some of the challenger sector players did not even have a so-called customer risk assessment system set up.
The FCA focused on challenger banks that were relatively new to the market and offered a quick and easy application process. The sample selection included six challenger retail banks, which primarily consist of digital banks – over 50% of the relevant firms. The sample covered over 8 million customers.
CUBE’s Head of Sales in America, Rob Fulcher says that compliance teams are struggling to keep up. Moreover, just increasing headcount to the equation won’t streamline current inefficiencies. Cube is the global regtech provider empowering regulated financial institutions to meet cross-border compliance challenges head on.
Fulcher says that a year on from the Kalifa review, the FCA is putting its money where its mouth is and that fintechs need to consider regulatory compliance as a competitive advantage and not merely a tick-box exercise. That review highlighted the need for collaboration between the regulators and fintechs. Regulators are walking a tricky tightrope between keeping and creating regulations that are proportionate to financial risks, while still protecting consumers. In addition, the regulators are conscious of the need to avoid financial regulation that may stifle innovation and make the UK fintech sector less attractive. And as this note from Cube neatly summarises – why is fintech so hard to regulate – the regulator faces no easy job.
Adds Fulcher: “Good progress has been made over the past 12 months since Kalifa reported and a number of the Kalifa proposals have been implemented but there is so much more that we could be doing. The FCA is focussing more on fintechs because of their rapid growth. And of course the IMF has also highlighted that this growth poses an economic risk. In addition, the fintechs have not yet faced operating during a period of economic downturn. Fintechs are still young and still maturing but they are becoming more mainstream. Any gaps in regulation do leave consumers in a vulnerable position.”
Looking ahead, Fulcher stresses that fintechs who do it get it right in ensuring they have watertight compliance practices will be able to gain a competitive advantage. He says that regulators need to protect consumers from additional risks and work with fintechs to develop workable new regulations and also oversee a burgeoning number of new businesses.
For global regulators, fintech regulations should be a priority. Moreover, collaboration with the industry will allow fintechs to remain competitive and continue to grow in the future. Given its role in solving complex regulations for regulated institutions of all shapes and sizes, this leaves Cube well placed to grow as it works with clients to cope with the rapidly evolving regulatory landscape.
CUBE’s Head of Sales in America, Rob Fulcher speaks with RBI editor Douglas Blakey