A theme of these blogs has been seeking to understand the underlying nature of different aspects of regulation - whether it's cyclical, part of a trend, a perennial, or something genuinely new. This is a simple classification system, but still useful so long as you don't shoehorn things into it. Against this test, financial crime can just about be viewed as a trend, though with important caveats.
There is a lot of attention at present on the UK's approach to financial crime due to the Salisbury poisoning and the consequent focus on London as a home for Russian oligarchs. So it's not a bad time to take a step back and look at some of the wider reasons why UK regulators find financial crime tricky to tackle consistently.
Here are four of the most important:
1. Conscious opponents: Regulation operates on the basis that the vast majority of the regulated want to do the right thing, and that firms don't start with the intention of covering their tracks. Financial crime isn't like this.
2. Crime is different: Outside of financial crime, regulatory breaches typically aren't criminal, and as a consequence regulators often find it hard to change their mindset.
3. Multiple agencies: When it comes to financial crime, only really in cases of market abuse is the regulator the only authority involved. This has pluses and minuses but undoubtedly doesn't make investigations logistically easy.
4. Reactive resourcing: Financial crime is typically hard to spot. Firms are usually as much in the dark as the regulator, and a resourcing model based on size of balance sheet/number of customers isn't always the best guide to high risk areas.
Despite the above, financial crime has slowly assumed a more central place in the regulators' world view. Again, there are four main reasons for this:
1. Recurring scandals: From the closure of BCCI to various rogue traders (starting with Nick Leeson and Barings), these have pushed the regulator (starting with the Bank of England in the 90s) to devote more resource.
2. Greater responsibility: In addition to fraud and money laundering, market abuse and terrorism finance have steadily gained prominence. Periodically, so too have PEPs (politically exposed persons), such as (then) President Abacha of Nigeria.
3. Other regulators: Primarily in the US, other regulators have taken a more activist and more aggressive approach (bigger fines etc.), and this has continually challenged the UK's more measured approach.
4. London's evolution: Ever since the mid 1980s and Big Bang, London has been a hub of globalisation. This has lots of benefits but also carries cost, of which greater exposure to financial crime is a major part.
In light of both recent events and the longer historical arc, now isn't a bad time for UK regulators generally (not just the FCA) to review their approach to financial crime in the broadest sense. RegTech could well be part of the answer and a major Sprint is coming up, importantly involving other regulators (see link).
For firms, it's a case of doubling down on their own risk management, avoiding group think, and making sure they're targeting financial crime itself, and avoiding the temptation to focus on compliance as an end in itself.
We will convene our next TechSprint in late May to focus on use cases in the AML, financial crime, and terrorist financing domain. The TechSprint will include participation from international regulatory colleagues.