• Home
  • Insights
  • FCA update on their work towards reducing and preventing financial crime

15 Feb 2024

FCA update on their work towards reducing and preventing financial crime

Linkedin

The FCA has provided a progress update on their work in their recent publication, "Reducing and preventing financial crime", and they look ahead to identify four areas of focus in the coming year. In this article, we summarise the key takeaways regulated firms need to consider. 

Two-minute speedread

Looking back

  • Investment and APP fraud are priorities.
  • Prevention, including initiatives to inform and educate the public, is critical, coupled with a strong enforcement response to maximise the deterrence.
  • The FCA's approach to money laundering and sanctions involves making sure that would-be new entrants have proportionate financial crime controls, driving continued improvements in firms, and removing firms that cannot establish adequate financial crime controls.
  • Working with firms: Consistent with the national Economic Crime Plan and Fraud Strategy, the FCA's work is based on a partnership approach, with the efforts of both public and private sectors, including firms, to reduce and prevent financial crime. This involves regular engagement with the private sector.

Looking forward

  • While the financial services industry must continue to lead the charge on reducing financial crime, others such as Big Tech, social media platforms and telecommunications firms also have a vital role.
  • Four areas to focus on:

1. Data and technology: While technology is transforming fraud and money-laundering detection, cyber fraud, cyber-attacks and identity fraud are increasing in scale, sophistication and firms must ensure that their systems and controls keep up and calibrate how they use technology.

2. Collaboration: one of the key factors in successfully reducing financial crime is for firms and wider partners to work collaboratively. An example is FCA's persuading Google, Bing (Microsoft), Meta, X/Twitter and TikTok to change their policies to only permit ‘paid for ads’ for financial services, including investments, that have been approved by an authorised person.

3. Consumer awareness: Raising consumer awareness is essential to combatting financial crime through various initiatives.

4. Metrics - measuring effectiveness: Measuring the effectiveness of fraud and money laundering prevention will allow firms to be clear on the impact their interventions are having.

What’s next?

  • The FCA say "bolder and more innovative solutions" are needed - recent multi-firm work highlighted that firms could do more to prevent fraud.
  • With the PSR’s new mandatory reimbursement requirement coming into force in 2024, firms have greater incentive than ever to lead the charge on fraud prevention.
  • A key focus in 2024 will be the FCA's work to support Government proposals to reform the AML supervisory regime.
     

As the FCA pass the midpoint of their 3-year strategy, they have summarised the work delivered over the past 18 months and identify 4 areas of focus where they say further collaborative effort can help shift the dial decisively on reducing and preventing financial crime.

Looking back

Fraud

The FCA's strategy recognises that fraud was a rapidly growing and complex issue. Without a national plan at that time, they had to set targets that aimed to reduce growth in fraud as a priority. That strategy also recognised investment fraud and authorised push payment (APP) fraud as two particular priorities.

The FCA claim that in 2023, the rate of growth of investment fraud slowed significantly in contrast to growth in numbers and value the year before.

The FCA say prevention has been critical, reinforced through working with industry and partners to strengthen the wider system to reduce the risk of harm where possible, as well as initiatives to inform and educate the public. The FCA highlight:

  • Issuing 2,286 warnings about possible scams in 2023 (an increase of 21% from 1,882 in 2022) alerting consumers about firms and individuals operating without FCA authorisation.
  • Alongside the ASA, engaging with social media influencers and their agents to give them clear information about what constitutes an illegal financial promotion.
  • Persuading platforms such as Google, Bing and Meta to tackle illegal financial promotions and scam adverts.
  • Running 6 ScamSmart campaigns (covering investment fraud, loan fee fraud, and pension scams).
  • Conducting/publishing multi-firm reviews on how firms mitigate the risks of fraud, including on money mules, anti-fraud controls and complaint handling.
  • Delivering an anti-fraud assessment framework across the FCA to help assess the strength of the anti-fraud systems and controls of the firms they regulate.
  • Working with the Payment Systems Regulator (PSR) to support the mandatory reimbursement of APP fraud, expected to come into effect in 2024.
  • Working with both the Treasury and PSR on the legislative and regulatory change necessary to enable firms to slow payments where they suspect fraud.

Alongside prevention, they say there has been a strong enforcement response to maximise the deterrence impact of their fraud work. This includes taking action against those who dishonestly abuse their regulated status, and investing more in their capacity to deal with the harm caused by those operating outside their regulatory perimeter.

Money laundering and sanctions

The FCA say their approach to money laundering and sanctions involves making sure that would-be new entrants have proportionate financial crime controls for their business, driving continued improvements in regulated firms, and removing firms that cannot establish adequate financial crime controls. Their work is data and intelligence-led and delivered through partnership with the National Economic Crime Centre (NECC) and other authorities. Progress includes:

  • developing a synthetic data sanctions testing tool that allowed testing of over 90 firms and publishing the results;
  • maintaining a robust and proportionate approach to authorisation. In 2023, 40% of Annex I applications (firms offering services that are registered with FCA for anti-money laundering purposes only) were rejected, withdrawn or refused, along with over 88% of Crypto registrations; and
  • conducting and publishing multi-firm reviews.

Through the Office for Professional Body Anti‑Money Laundering Supervision ("OPBAS") which is housed within the FCA, they say they have sought to drive improvements in the 25 Professional Body Supervisors (PBSs) for anti-money laundering in the legal and accountancy sector.

OPBAS will continue to use all the regulatory tools and powers available within the current AML framework to hold PBSs accountable. However, the FCA comment that the lack of consistent effectiveness across PBSs indicates that legislative reform is needed to improve standards of supervision.

Working with firms

Consistent with the national Economic Crime Plan and Fraud Strategy, the FCA say their work is based on a partnership approach, recognising that it takes the efforts of both public and private sectors, including regulated firms, to reduce and prevent financial crime.

They refer to regular engagement with the private sector directly, through their associations, and for example the Joint Money Laundering Intelligence Taskforce. These efforts include:

  • publishing findings from reviews to give industry feedback to help firms improve their controls;
  • a TechSprint focused on tackling APP Fraud held in September 2022;
  • targeted engagement with payments firms; and
  • co-leading the work on establishing an approach to public and private prioritisation, and strengthening the role of NECC as the system leader.

Looking forward

Four areas to focus on

While the financial services industry must continue to lead the charge on reducing financial crime, others such as Big Tech, social media platforms and telecommunications firms also have a vital role. The FCA say they have identified 4 areas where further collaborative action can help "shift the dial decisively" on reducing and preventing financial crime.

1. Data and technology

The FCA are concerned that while technology is transforming fraud and money-laundering detection, cyber fraud, cyber-attacks and identity fraud are increasing in scale, sophistication and impact as artificial intelligence (AI) becomes more widespread, with criminals using technology including AI to target consumers and firms. Firms must ensure that their systems and controls keep up with the increasing sophistication of criminal groups and should use the advances in technologies to help prevent financial crime. Firms must calibrate how they use technology to their individual requirements to be as effective as possible; that does not mean they should calibrate once and then ‘plug and play’ forever. Firms need to keep fine-tuning their response to combat the changing threat.

Case study: how some firms use behavioural biometrics to tackle APP fraud 

Firm A used a behavioural biometrics tool across its internet and mobile banking as well as monitoring login pages. This technology allowed the firm to get a more detailed profile of customers’ digital behaviour, including capturing information on the customer's use of their devices to input information. This built a picture of what ‘typical’ customer behaviour looks like and so what unusual or suspicious looks like. The firm also introduced biometric tagging of the payment pages in its mobile banking app.

Suggested questions for firms' boards to ask:

  • 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

One of the key factors in successfully reducing financial crime is for firms and wider partners to work collaboratively. The FCA have a key role in the Economic Crime Plan 2, and internationally the FCA continue to strengthen relationships with jurisdictions where supervisory cooperation is needed to address cross-border financial crime risks.

Case study: working across sectors to tackle unauthorised financial services adverts online

The FCA refer to their close engagement with Google, Bing (Microsoft), Meta, X/Twitter and TikTok leading them to change their policies to only permit ‘paid for ads’ for financial services, including investments, that have been approved by an authorised person.

In March 2023, the FCA established the Synthetic Data Expert Group (‘SDEG’)( 21 experts across financial services, the public sector, data and technology vendors, and consumer groups) to further explore how financial markets can use synthetic data in response to the difficulties firms face in accessing and sharing data in financial services.

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 implemented in 2024.

OPBAS found that none of the PBSs it assessed in its 2022/23 assessment round had fully effective intelligence and information sharing. Improved system coordination is a key aim of the Government’s proposed reform of the anti-money laundering supervisory regime.

The FCA are working with law enforcement agencies such as the police to help design and introduce better intelligence sharing and prioritisation across the financial sector. They have also worked with the NCA and others on fraud campaigns focused on pursuing offenders and protecting consumers.

As part of their work on the Economic Crime Plan 2, the FCA are also examining how they can help strengthen the existing system by 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.

Suggested action:

  • The FCA encourage firms and cross-sector partners to participate in data sharing initiatives and explore the latest advances in data sharing technology to improve collaboration.

3. Consumer awareness

Raising consumer awareness is essential to combatting financial crime. According to UK Finance’s Annual Fraud Report, in 2022, due to banks’ investments in fraud detection technology, the industry was collectively able to stop 61.5p in every £1 of attempted unauthorised fraud from occurring. One outcome has been that fraudsters are now increasingly targeting consumers directly to convince them to release funds for seemingly legitimate purposes. In the first half of 2023 there was a 22% increase in the volume of APP cases compared to the first half of 2022. This shift makes it essential that consumers are supported and educated on how to spot the signs of a fraud.

The FCA point to their ScamSmart campaign in relation to investment, pension and loan scams and drives consumers to the FCA's Warning List where they can check whether a firm is regulated before they invest. In 2021, the FCA also launched their InvestSmart campaign targeting younger investors though social media. 

Other initiatives include Stop Scams, a not-for-profit private sector collaboration to prevent harm and loss caused by fraud, and Take Five, a national advice campaign to prevent fraud.

However, "APP fraud remains prevalent".

Case study: Financial Influencers (‘finfluencers’) – from campaign to enforcement

In April 2023, the FCA and ASA launched a campaign to engage with influencers and their agents, providing clear information about what constitutes an illegal financial promotion to make them aware of the rules and the law and avoid promoting financial products without authorisation.

The FCA have also consulted on new, updated Social Media Guidance that will give additional clarity on influencers’ obligations when advertising through their social media channels. The FCA say they will use all the methods at their disposal to curb this growing trend.

Suggested questions for firms' boards to ask:

  • 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

Measuring the effectiveness of fraud and money laundering prevention will allow firms to be clear on the impact their interventions are having. The FCA refer to the PSR’s publication of APP fraud performance data which they say should encourage firms to continue to seek outcome-based, measurable solutions to the threat.

The PSR’s new reimbursement requirement will come into force in 2024, making sending and receiving firms liable for reimbursing victims. The FCA say they expect this measure to further 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 highlight their own outcomes and metrics framework which measures the effectiveness of their financial crime work using a mix of market metrics, survey data and internal measures to track progress against their strategic aims and help allocate resources.

Case study: How the FCA measurably contribute to the fight against fraud 

The FCA measure the impact of the activities that contribute towards their work to prevent fraud. Following the first year of their 3-year strategy, internal metrics highlighted their increased scam detection capability and improving consumer awareness. 

In terms of other metrics, the FCA say that they issued 34% more consumer alerts on their Warning List in 2022 compared to their 2021 baseline, and made further progress in 2023 by issuing 21% more warnings than in 2022. By increasing the number of warnings, the FCA increase the chances of consumers getting a positive search result when searching the list. In 2022 their ScamSmart campaign guided 11% more consumers to their Warning List than in 2021. Data also shows that more consumers were contacting the FCA about a potential scam before having invested. This suggests consumers are getting better at spotting the signs of a scam.

Suggested action:

  • Firms should be able to measure their own effectiveness at preventing financial crime through using outcomes and metrics. The FCA encourage firms to consider how their interventions could contribute towards a reduction in overall rates of financial crime. 

Suggested questions for firms' boards to ask:

  • 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?

What’s next?

While recent progress has been made in addressing the rise in financial crime, the FCA say "bolder and more innovative solutions" are needed.

Their recent multi-firm work highlighted that firms could do more to prevent fraud. With the PSR’s new mandatory reimbursement requirement coming into force in 2024, firms have greater incentive than ever to lead the charge on fraud prevention. The FCA require all authorised firms or firms registered for money laundering purposes to have systems and controls in place to manage their risks of being used to commit financial crime. Firms are the first line of defence and must make use of new systems, processes, data and approaches to keep up with emerging risks.

Data shows that 77% of all APP frauds and 32% of all APP losses reported in the first half of 2023 originated online and so the FCA welcome the Online Fraud Charter announced by Government in November 2023. Through it, the FCA expect social media platforms to work to clamp down on fraud, including organic content promoting scams.

A key focus in 2024 will be the FCA's work to support Government proposals to reform the AML supervisory regime. OPBAS has raised standards of PBS supervision and is pushing for more significant improvement, but the complexity of the current framework hinders consistency and effective coordination. This is compounded by the inherent risk of conflict created by many PBSs having dual roles as advocates for their members and as AML supervisors. Hence the FCA support the Government’s rationale for reforming the AML supervisory regime and consider that the option of a Single Professional Service Supervisor offers the best opportunity to deliver on the aims of the reform.

What we think…

It is no surprise that financial crime, and more specifically, money laundering, sanctions compliance, investment and APP fraud, are near the top of the FCA's agenda.

Given that is the case, however, regulated firms and other firms coming within the FCA's purview should also make those matters a compliance priority. Amidst the account of the FCA's and others' initiative to tackle these financial crimes, the publication includes a number of practical questions which the FCA says firms should be asking themselves.

The sad backdrop though is that scammers and scams are growing in sophistication and apparently increasing in frequency.

Finally, we would also rank cyber-attacks/resilience alongside these priority issues.

Author: David Capps 

Linkedin