Observations on the impact of de-risking in the UK and the steps FCA should take to tackle unwarranted de-risking. Providing access to at least basic financial products and services is a prerequisite for the participation in modern economic and social life and de-risking, when unwarranted, can cause the financial exclusion of legitimate customers. It can also affect competition and financial stability.
De-risking refers to decisions taken by financial institutions not to provide services to customers in certain risk categories. De-risking can be a legitimate risk management tool but it can also be a sign of ineffective money laundering (ML) and terrorist financing (TF) risk management, with at times severe consequences.
It is becoming imperative to review the impact of de-risking across the UK and to better understand why institutions decide to de-risk particular categories of customers instead of managing the risks associated with such relationships. The significance of this is to avoid pushing de-risked customers underground thereby creating a much larger financial black market problem. Recent findings suggest that de-risking has a detrimental impact on the achievement of UK’s objectives, in particular in relation to fighting financial crime effectively and promoting financial inclusion, competition and stability in the UK financial market.
It is my opinion that regulatory guidance on how to manage ML/TF risks, if applied correctly, should help avert unwarranted de-risking. To this end, I believe the following steps will help:
- Financial institutions de-risking should provide FCA their rationale for de-risking.
- FCA should consider whether an effective risk management system may have prevented de-risking.
- Fraudulent de-risked customer will simply disappear, however additional mitigating measures could be put in place to monitor genuine customers who object to de-risking.
- FCA to commit to following-up with financial institutions on the actions they have taken to tackle unwarranted de-risking going forward.
- FCA to engage more actively with institutions that de-risk and with users of financial services that are particularly affected by de-risking, to raise mutual awareness of their respective rights and responsibilities.
How can Kharis & Knoble help?
Kharis & Knoble Risk and Compliance Consultants specialises in providing support in the form of training, policy writing and overall compliance health check for financial services companies and regulators in the UK, EU, Middle East and Africa to leverage an effective and sustainable AML, Fraud and Anti Bribery and Corruption environment as a competitive advantage and driver of business growth. Kharis & Knoble will help you build a robust and bespoke risk management framework that will safely minimise de-risking across your organisation.