Navigating evolving financial crime risks in UK markets
Recent regulatory publications from the Financial Conduct Authority and Bank of England provide critical insights into the evolving landscape of financial crime prevention in UK markets.
As financial institutions face increasing scrutiny and complex threats, understanding the current regulatory perspective is essential for effective risk management.
The persistent challenge of money laundering through markets
The FCA's January 2025 report on Money Laundering Through Markets (MLTM)1 highlights that despite progress, significant challenges remain in identifying and preventing illicit financial flows through capital markets.
The report identifies several persistent obstacles:
- Limited visibility of entire transaction chains.
- High transaction volumes overwhelming manual monitoring capabilities.
- Difficulty in identifying suspicious activity due to the complexity of market transactions.
- Low levels of tailored transaction monitoring tools specific to capital markets.
The FCA noted that 75% of wholesale broker firms reported that they have not refused or exited any customers and have also not disclosed any Suspicious Activity Reports (SARs) to the National Crime Agency during the reporting period. This statistic raises questions about whether current detection methods are sufficient to identify suspicious activities.
Regulatory expectations for enhanced transaction monitoring
Transaction monitoring emerges as a critical focus area in the FCA's report. Many firms struggle with detecting money laundering compared to market abuse, with the FCA observing that "monitoring transactions in isolation does not regularly identify suspicious activity, as transactions may not appear unusual or suspicious on their own."
The regulator emphasises the need for an integrated approach that considers:
- Customer KYC information
- Proactive intelligence-led analysis
- Hidden or linked relationships
- Changes in ultimate beneficial ownership
- Other contextual information
For financial institutions operating in capital markets, this means developing more sophisticated monitoring systems that can connect disparate data points and provide a holistic view of transaction patterns.
The role of technology and AI in addressing financial crime risks
According to the Bank of England's November 2024 survey on artificial intelligence in UK financial services, 75% of financial firms are already using AI, with another 10% planning to implement AI solutions over the next three years. This represents a significant increase from 58% in 2022.
For financial crime prevention specifically, the survey reveals encouraging trends:
- Anti-money laundering and fraud prevention is ranked among the top three areas where firms perceive the greatest current benefit from AI
- The use of AI in regulatory compliance and reporting is expected to grow significantly over the next three years
- Cybersecurity, another key aspect of financial crime prevention, ranks highly for current AI applications
However, the survey also highlights concerns. Of the firms using AI, 46% reported having only a 'partial understanding' of the technologies they use, while third-party implementations have increased from 17% in 2022 to 33% today.
This increasing reliance on external AI solutions, combined with limited internal understanding, could create new vulnerabilities if not properly managed.
Governance and risk management imperatives
Both reports emphasise the importance of strong governance frameworks. The FCA expects firms to have "robust systems and controls at each stage of the customer and transaction journey" with appropriate oversight, resourcing, training, and documentation.
For AI implementations specifically, the Bank of England survey found that 84% of firms reported having an accountable person for their AI framework, with 72% allocating accountability to executive leadership. However, accountability is often split, with most firms reporting three or more accountable persons or bodies.
This distributed accountability model requires clear communication channels and well-defined responsibilities to ensure effective risk management and regulatory compliance.
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