FCA identifies four areas of focus for reducing and preventing financial crime

In this blog, fscom’s Senior Manager, Anna Sweeney summarises the FCA’s recent update on the progress they have made to address its key priority of reducing and preventing financial crime and the look ahead on the four areas of focus on this for the coming year.

Introduction

In 2022, the Financial Conduct Authority (FCA) laid out its 3-year strategic vision, with a strong emphasis on reducing and preventing financial crime. As financial crime continues to evolve, staying ahead of the curve is a key expectation for regulated entities. The recent update published by the FCA on 8 February 2024, sheds light on the progress made in tackling this issue and outlines four key focus areas for the sector to drive tangible results:

1. Data & Technology
2. Collaboration
3. Consumer awareness
4. Metrics – measuring effectiveness

Progress made to date

Work delivered in the past 18 months has had the greatest impact in the areas of fraud, money laundering and sanctions evasion. The FCA appear to be focusing great efforts and resources into fraud prevention measures, with investment fraud and APP fraud at the forefront of the agenda.

Fraud

Fraud prevention initiatives delivered in past 18 months included:

• Issuing more warnings about possible scams;
• Issuing clear guidance on what constitutes an illegal financial promotion;
• Liaising with platforms such as Google, Bing and Meta to ban paid-for adverts for UK financial services that are not approved by an FCA authorised firm;
• TechSprint with the National Crime Agency (NCA) and law enforcement partners, aiming to foster greater data sharing to combat investment fraud;
• Public awareness campaigns;
• Sharing best practice observed at multiple firms across the industry through multi firm reviews;
• Implementing an anti-fraud assessment framework to help assess the strength of the anti-fraud systems and controls of regulated firms;
• Working alongside the PSR to support the introduction of mandatory reimbursement of APP fraud; and
• Working with both the Treasury and PSR to enable firms to slow payments where they suspect fraud.

Fraud enforcement actions included:

• Since April 2023, the FCA has charged 15 individuals with fraud offences, with more to be charged imminently; and
• The FCA has invested in their own systems and people, with over 70 new hires working on fraud-related initiatives since April 2022.

Money laundering and sanctions

Current money laundering and sanctions initiatives include:

• Maintaining a robust and proportionate approach to authorisation;
• Conducting and publishing multi-firm reviews in the past 18 months to share their expectations of how firms should ensure their controls are proportionate to the risk; and
• Developing and rolling out a synthetic data sanctions testing tool that allowed the FCA to test over 90 firms and publish the results in September 2023.

Priorities for Regulated Clients

For regulated clients in the financial services sector, staying compliant with regulations and effectively combating financial crime are paramount. The FCA’s recent update underscores the importance of focusing on four key areas:

1. Data & Technology

Although technology is transforming fraud detection capabilities, criminals are also availing of technology and AI particularly to increase the scale, sophistication and impact of their activities.

• Firms must ensure that systems and controls keep up with the increasing sophistication of criminal groups and should use the advances in technologies to help prevent financial crime. They must effectively calibrate their tools so that they are specific to their requirements and continuously re-calibrate to meet the needs of an ever-changing threat landscape;
• Firms may use the enhanced synthetic datasets for innovators to develop solutions to tackle fraud, allowing for further feedback and iterative mechanisms; and
• Some firms are successfully using behavioural biometrics to tackle APP fraud by using the data to create a more detailed profile of customer behaviour and more easily identify behaviour that is unusual or suspicious.

The FCA recommends that each firm asks itself the following questions:

• Does my firm know how criminals are likely to be using new technology to target our customers and business? Does my firm have a way of keeping updated on new techniques or typologies?
• How is my firm keeping updated with good practice? Is my firm targeting investment in technology and data to address our firm’s and customers’ key financial crime risks?
• How is my firm measuring the outcomes we are achieving here?
• If my firm is using third party technology to detect, is the technology calibrated to the risks my firm faces and its customer base?

2. Collaboration

Success in preventing and reducing financial crime hinges on effective collaboration among firms and wider partners. Sharing data and intelligence is crucial for staying ahead of fraudsters. Initiatives like Pay UK and UK Finance’s work on the new Enhanced Fraud Data system should see an increase in intelligence sharing between payment service providers once the system is implemented in 2024. This will further strengthen firms’ abilities to stop fraudsters from using them as conduits for financial crime.

The FCA is looking into developing a single assessment of each financial crime threat. This will involve setting agreed priorities to guide the work of all parties to inform a better understanding of system-wide risk.

Firms and cross-sector partners are encouraged to participate in data sharing initiatives and explore the latest advances in data sharing technology to improve collaboration.

3. Consumer Awareness

There has been an increase in APP fraud, as criminals target consumers directly to convince them to release funds for seemingly legitimate purposes. It is therefore essential that consumers are supported and educated on how to spot the signs of a fraud. 

The ScamSmart campaign raises awareness of investment, pension and loan scams and drives consumers to the FCA Warning List where they can check whether a firm is regulated before they invest.

The FCA welcomes and supports the plans to launch a simple cross-government campaign to streamline and amplify anti-fraud communications.

FCA recommends that each firm asks itself the following questions:

• Is my firm raising awareness among our customers of the fraud risks relevant to the business we do with them?
• Are we using/being consistent with the language/approaches proposed by public bodies or our association?
• Are we getting feedback? How do we know if it is working?

4. Metrics – Measuring Effectiveness

The PSR has published APP fraud performance data, which should encourage firms to continue to seek outcome-based, measurable solutions to the threats they face.

The mandatory reimbursement requirement for victims of APP fraud will come into force in 2024, making sending and receiving firms liable for reimbursing victims. This measure aims to incentivise firms to find innovative solutions to tackle APP fraud for both incoming and outgoing payments. Having robust outcomes and metrics in place will clearly define the benefits of the solutions they have developed.

The FCA uses outcomes and metrics framework to measure the effectiveness of its work, for example:

• 34% more alerts on warning lists compared to 2021, thus increasing the likelihood of a consumer getting a positive result when searching the list, hopefully leading to fewer victims of investment fraud;
• 11% more consumers accessed the list in 2023 than 2021; and
• Volume of consumers contacting FCA to query investment firm is increasing, suggesting increased awareness of scams.

Firms should be able to measure their own effectiveness at preventing financial crime through using outcomes and metrics, for example:

• What metrics is the board getting on the firm’s outcomes on tackling financial crime?
• How are these metrics tied to activities or work programme metrics, and budgets?
• How does the firm compare with its peers?

Conclusion

In conclusion, addressing financial crime remains a top priority for the FCA and for regulated entities. By focusing on data & technology, collaboration, consumer awareness, and metrics, firms can strengthen their defences against fraud and contribute to a safer financial ecosystem. The FCA’s ongoing efforts to drive progress in these areas will continue to play a vital role in mitigating the risks associated with financial crime.