Financial crime outlook: Heightened regulatory overhaul and scrutiny



Publication March 2019


Governments and financial institutions globally are grappling with diminishing public trust. In response, regulators are taking a tougher stance on financial crime, which is also resulting in heightened regulatory overhaul.

This has been highlighted by an increasing number of s166 Skilled Person Reports being required in the UK. Furthermore, the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry delivered its final report in February. It has exposed deficiencies in operational policies, procedures and controls, which will have implications for financial crime now and in the future.

In our latest article, we explore some of the themes we are seeing across the globe, and what this means for financial institutions.

Heightened regulatory climate and the 5th AMLD

In the UK the FCA is requiring an increased number of s166 Skilled Persons Reviews, which are the appointment of an independent third party to review aspects of a regulated firm’s practices. In the first quarter of the 2018/2019 financial year there were three Reports commissioned, which has risen in the second quarter to sixteen and to nine in the third quarter. Financial penalties totalling £69.9 million were imposed in the UK in 2017/2018, though the risk reputation and resulting loss in business is of greater concern. With the rise of new market entrants such as virtual banks, regulatory action could result in established institutions losing their market share.

There have also been recent changes in the anti-money laundering framework and the move towards the 5th Anti-Money Laundering Directive (5th AMLD). One such example from the 5th AMLD is changes to electronic identification customers. Firms will be asked

  • Do they have the right technology to enable them to conduct identification and verification electronically?
  • Do firms have the correct infrastructure to enable them to store and extract this data electronically?

With such a speed of change, regulated firms cannot rely on legacy policies, procedures and controls. Ongoing review and evolution of financial crime compliance is essential to avoid heightened risk to your business and your customers. Regulators are being increasingly proactive and it is therefore incumbent upon regulated firms to address current practices that are subject to a Skilled Person Review with a view to the coming changes.

Going beyond remediation

The Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has now been published. Commissioner Hayne comments that, until recently, too little attention has been given in Australia to regulatory compliance and conduct risk, and highlights the need to improve leadership, governance and culture in financial services entities. Hayne has re-emphasised the underlying “six norms of conduct” he identified in his interim report

  • Obey the law
  • Do not mislead or deceive
  • Act fairly
  • Provide services that are fit for purpose
  • Deliver services with reasonable care and skill
  • When acting for another, act in the best interests of that other

One example of poor conduct from the Royal Commission was the charging of fees for no service. This has implications for financial institutions in relation to financial crime as it provides an opportunity to reassess processes for conducting ongoing customer due diligence. Remediation is a critical step, but financial institutions should go further to ensure that on-boarding and regular customer reviews are always a central pillar of how they deliver products and services. There is a pressing need to break down silos between different parts of the business, create a culture of ‘Should I?’ compared with “Can I?” and ensure the interests of the customer are put first.

Turning obstacles into opportunities

Heightened regulatory overhaul and scrutiny is a challenge to financial institutions, however, it provides a unique opportunity to get ahead of your competitors

  • Remediation as an opportunity – righting past wrongs rebuilds customer trust, but also enables cultural change from within. The financial institutions that are the most proactive in evolving their compliance culture will have a beneficial advantage through increased customer trust that will ultimately drive market share.
  • Harnessing technology – technology is a tool, not the end result. Aligning policies, procedures and controls with effective technology will aid in financial crime compliance. This synergy will become increasingly important given the growing number of new market entrants and the onset of the 5th AMLD.

This is the third article in our financial crime outlook series. If you would like to receive further updates, please register here.

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