Managing financial crime in a disrupted world


Open banking, open risk?

Managing financial crime in a disrupted world

The financial services industry is changing faster than any other time in the last half century. Traditional retail banks face stiff competition from new market entrants including challenger banks and technology-based financial service providers (‘FinTechs’) that are often less restricted by costly legacy systems. At the same time regulatory changes are creating a new environment of ‘Open Banking’ that is diminishing the banks’ ownership of the customer relationship.

A continued focus on financial crime

Regulatory pressure has been growing, with bodies such as the Financial Action Task Force becoming more pro-active in shaping the regulatory environment. UK regulations are more extensive, with initiatives such as the Financial Conduct Authority’s (FCA) Senior Managers Regime, requiring bank executives to take personal accountability for managing financial crime risks. As a result, banks are devoting greater resources to managing financial crime risks.

What are the emerging financial crime risks?

1. The changing customer dynamic

Increasingly, consumers now have relationships with multiple financial service providers that can meet their differing needs. FinTechs and banks are looking for fast and simple methods to take on new customers whilst complying with their legal and regulatory obligations.

Requests for customer data are now duplicated across multiple organisations as individual customers contract with a larger pool of service providers, an inherently inefficient situation. At the same time regulatory guidance is interpreted in different ways by different organisations.

2. New products and services

The global nature of crowd-funding and peer-to-peer (P2P) lending platforms mean that organisations are less likely to be able to vet either lenders or borrowers to the same extent as traditional banks. This opens the possibility of legitimate funding being channeled into misleading or fraudulent investments, or into legitimate projects as money-laundering vehicles.

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3. The rise of cryptocurrencies

Trading of cryptocurrencies takes place outside of the traditional banking networks, on peer-to-peer marketplaces or online exchanges; their values are not backed by central banks or governments but driven purely by market demand.

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4. Disruption and disaggregation

As the number of players providing financial services increases, the proportion of transactions being processed by any one organisation decreases. Banks will have a limited view of the overall activities of their customers, making it harder to identify unusual or suspicious behaviours.

Clarification of accountability

Governments and regulators have long expected and mandated banks to be the chief implementers of anti-financial crime controls, due to their experience of implementing rigorous controls and their long-standing customer relationships. Banks have had little option but to accept these responsibilities, however, changes in market dynamics are blurring the lines of accountability as it becomes less clear who “owns” the customer relationship.

Rigorous financial crime controls are expensive to implement and maintain, and the penalties for failing to comply with them, both financial and reputational, are significant. But when profits are eroded by FinTechs that are not subject to the same regulatory scrutiny, banks must inevitably find a way to either reduce their costs or share them across the market.

The strategic steps for managing financial crime risks

The ability of banks and FinTechs to overcome the challenges of managing financial crime risks in a disrupted environment, will depend on a number of factors. However, we believe that it is time for new approaches to be made.

  1. Rebalance accountability
    Regulators must find a way to rebalance accountability for financial crime risk management, by offering incentives and enforcing penalties to all players in the market, to drive desired behaviours. Clear roles and responsibilities must also be set out, with a dynamic framework in place to enforce and evolve them in line with market changes.
  2. Collaboration is essential
    By collaborating and sharing intelligence, learnings and data, organisations will be better able to identify the financial crime activities that are endemic in the system. Enabling this sort of collaboration will require leadership and vision from within the industry, as well as the regulatory support necessary to overcome data privacy and jurisdictional regulatory differences.
  3. Harness providers expertise
    Both banks and FinTechs need to harness industry expertise and experience in and combine it with innovative technology and data analytics to address customer and market problems. But they need to do this by leveraging their own skills and experience to develop new approaches to managing financial crime risks.

To learn more download our full report (PDF) or contact us directly for a discussion tailored to your business needs.

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