ABANDONING THE UN-BANKABLE?
The phrase “de-risking” has gathered momentum in the last year and is commonly used in the banking world to describe the process by which banks and financial institutions have withdrawn services from certain customers, based on their profile, products, services or location.
In some cases, this has resulted in wholesale withdrawal from certain hitherto profitable business areas.
Some commentators have called the reaction “knee-jerk” and unwarranted, particularly insofar as it affects vulnerable members of society, voluntary organisations, charities and small businesses. Nevertheless, it is not entirely unpredictable. Huge and unprecedented fines and penalties against major financial institutions have led to a sea change in attitudes towards compliance risk.
Such penalties have added to a negative public perception about the financial sector, and have led to extensive and persistent adverse commentary in the press and media. In an effort to shore up defences, financial institutions have engaged in a massive hiring round, despite the fact that too few experienced compliance professionals exist to meet the demand. Regulators appear to be communicating mixed messages. In the UK, the FCA has commented that they do not wish to see people denied access to legitimate services.
US authorities, however, have set out a number of high risk sectors and have launched “Operation Choke Point”, which aims to close off banking access to these high risk sectors.
Whilst these sectors present elevated financial crime risks, they do not constitute illegal business activity. A major withdrawal by larger financial institutions from certain areas of business is underway. Categories include specific jurisdictions – Standard Chartered recently exiting certain business in the United Arab Emirates and HSBC reducing its exposure to the British Virgin Islands; politically exposed persons and embassies; charities and non-governmental organisations; money services business – and, by extension, alternative payment mechanisms such as crypto-currencies; and correspondent banking. Aside from concern that such moves reduce access to banking services to legitimate and potentially vulnerable individuals and organisations, there is also a wider regulatory concern that any illegitimate businesses will be driven to less regulated or unregulated institutions, or underground altogether.
At the same time, one person’s loss is another’s gain, and it is highly likely that entrepreneurial and innovative providers will soon fill the void left by the larger players. Not only does the withdrawal of larger financial institutions from certain business sectors sacrifice potentially profitable business but, in the long run, it may actually help foster innovation in areas such as alternative payment technologies elsewhere – leading to further competitive disadvantage for larger institutions.
So what is the answer to this current dilemma? Clearly an approach that pays lip service to regulatory requirements through an embedded “tick box” mentality to knowing your customer has demonstrably failed. Not only has it failed but it has served no one’s purpose: not the business, not the compliance function, nor the public at large. What appears to be missing, fundamentally, is real knowledge of a customer’s affairs. It is not sufficient that they are not on a blacklist, or a copy of a passport and address has been provided.
Who is your customer? How do they conduct business, where and with whom? What pressures are they under, internal or external that might lead them into a high risk situation? An informed viewpoint not only tackles the multifaceted compliance risks – which can never be reliably addressed through a “tick box” approach – but, more importantly, it allows financial institutions to retain good customers in the longer term, creating profitable and positive business.