Regulation itself is the primary driver behind an expected rise to £30 billion in UK financial institutions’ annual AML costs to £30 billion by 2023, a survey from LexisNexis Risk Solutions has found. The increase, from £28.7 billion in 2020, appears set to be invested in personnel rather than technology, however, with the survey – conducted in conjunction with Oxford Economics – finding that UK firms are responding to mounting AML pressure by increasing spend on teams rather than technology, with 70% of budgets committed to human resource.
The issues around AML and the wider response to financial crime were discussed extensively last week on a panel at A-Team Group’s RegTech Summit Virtual, a recording of which is still available to watch here.
The panel – ‘Leveraging RegTech to manage KYC, AML & financial crime compliance’ – discussed the pressures on KYC and AML compliance, how AI and machine learning can help to identify risks and fraudulent activity. The panellists included practitioners and RegTech executives, including moderator Dessa Glasser, Independent Board Member, Oppenheimer & Co., and Principal, The Financial Risk Group; Yasmin Omrani, Regulatory, Compliance, and AFC Innovation Lead, Deutsche Bank; Kai Schrimpf, Global Product Manager – AML Transaction Monitoring, UBS; Nitzan Solomon, VP, EMEA Head of Surveillance and Financial Crime Technology, Nomura; and Alexon Bell, Chief Product Officer, Quantexa.
The survey found that regulatory burden, rather than a rising criminal threat, to be the primary cause of the growth in compliance costs, as firms struggle to keep up with ever-increasing and changing regulatory requirements. The implementation of the Fifth Anti-Money Laundering Directive (5MLD) alone, is estimated to be costing the average UK financial institution around £750,00. Changes in data privacy requirements, customer demand for faster payments and increasing geo-political risks were all cited as key external drivers of increased compliance costs.
Rising costs were compounded by significant AML inefficiencies, the report found, including data quality, system failures, gaps in IT infrastructure, ineffective internal tools and outdated technologies. The report also found that firms are creating more work for themselves by erring on the side of caution, as a consequence of a fear of regulatory repercussions, if something is missed.
The research found that 53% of compliance budgets were spent on processes required to onboard new clients, such as Customer Due Diligence (CDD) checks, remote ID & verification checks and risk assessments, driven in part by the shift in demand for online services fuelled by successive lockdowns. A further 14% of budget was consumed by investigations and evidence gathering relating to enhanced due diligence checks.
According to Steve Elliot, Managing Director of Business Services for UK & Ireland at LexisNexis Risk Solutions, “Tech-enabled big data and analytics tools can help businesses transform the detection of financial crime and shift their focus towards prevention rather than detection. Good quality data alone can significantly transform a firm’s AML process effectiveness by reducing data silos and providing a far clearer picture of the risk a potential customer presents, reducing false positives and associated remediation tasks in the process, which as this report highlights, accounts for a further fifth of firms’ AML costs.”
The research was carried out between October – December 2020, commissioned by LexisNexis Risk Solutions and executed by Oxford Economics, consisting of a survey of 301 UK based financial services organisations (FSOs), including Retail banks, Challenger banks, Wholesale/Commercial banks, Investment banks/securities firms and money services businesses.