Doing the Lambert Walk
There is a visionary goal, then a tone of wistfulness and, finally, a plan – but with all the potential flaws resulting from a difficult compromise – in the report from Sir Richard Lambert FCSI (Hon).
The goal of making banking a profession is one we can all endorse as being in the public interest, particularly with the continuing public distrust of banks and bankers.
The wistfulness of noting that, years ago, banking qualifications and professional membership across the sector were the norm, and that something precious was lost in the boom decades up to 2008, is a reminder that professionalism, once achieved, should not be diluted. As members of a professional body, we all know that integrity, once gained, should never be compromised.
While the CISI has significant numbers of exam candidates who work in banking, we recognise that true professionals not only take exams, but also sign up to a code of conduct, maintain their competence once acquired and take care how they conduct themselves in and out of the workplace. We believe that is what professionalism means and, ultimately, that seems to be the way in which Lambert envisages banking should become a profession.
So, if Lambert is recommending an individual membership body, will he build on what we already have and recognise that the different professional bodies already offer much of what he sees as vital in the long term, or travel the long and difficult road of seeking to duplicate or merge?
Speaking after the launch, Sir Richard said: “Moving to individual members over time would enhance the body’s sustainability… in terms of funding, and stress the importance of individual responsibility.” He hopes that senior staff will sign up to the body.
However, we perceive a hint of reinventing the wheel at this point: shouldn’t banks be encouraging their staff to become members of a relevant professional body already in existence?
The plan, therefore, contains some flaws. On the one hand, we applaud the stated desire to work with the existing professional bodies. On the other, it is clear that Sir Richard ultimately envisages a body of individual membership, and therefore a potentially divisive vehicle if he wishes to keep existing bodies on board.
Six key professional bodies are involved in the review. They broadly welcome the higher standards, but there is confusion over why Lambert hasn’t mandated membership of the existing bodies. CISI Chief Executive Simon Culhane, Chartered FCSI says: “It is a shame that Lambert has stopped halfway when he could so easily have mandated membership of a relevant professional body, which means there is competition, and so very quickly achieved a demonstrable step change. As it is, I’m still unsure whether this new body is a cheerleader for higher standards or a potential competitor.”
The plan also has some flawless arguments: to have an independent board, which benchmarks standards across the whole sector, is a vision we endorse wholeheartedly. Applying self-regulatory zeal to both UK institutions and those foreign banks trading here will demonstrate a commitment from those banks that they intend to take ownership of the issues, sign up to a new culture and deliver tangible improvement.
Yet one of the strengths of professional bodies is that they exist to instil high ethical standards, irrespective of the might of any particular employing institution. Mark Bogard, Chief Executive of the National Counties Building Society, simply commented on the Lambert report by quoting the 19th-century social philosopher Peter Kropotkin, who would ask “whose ethics?”.
It will therefore be particularly important for the new body to prove its independence from the banks and building societies that will be paying for it, by setting a clear limit on the number of board members who may have links with the board of the new body. This will allay fears that it is a sub-branch of the British Bankers’ Association. Consumer groups should also be represented, with perhaps one position allocated to a journalist.
The CISI supports initiatives that will restore trust and raise standards, and seeks to collaborate and partner with a wide range of institutions in doing so. Our concern is that an initially clear vision will be clouded by the establishment of a delivery vehicle that sets aside the good already being done in this area, and seeks to replicate it with a new idea. For example, why not encourage banks to sign up to the CISI/Institute of Business Ethics Investing in Integrity charter mark, or mandate the CISI’s existing individual integrity programmes?
Ruth Martin is Managing Director of the Chartered Institute for Securities & Investment (CISI) and Chair of the professionalism stream at Professions for Good, a collaboration of the bodies responsible for entry policy, professional standards and qualifications across many of the UK’s largest professions.
|Lambert in 20 seconds
Sir Richard’s proposed new organisation, whose aim is to raise standards in banking, would be open to all banks and building societies in the UK, acting as an independent champion for better banking standards. Participating banks and building societies would commit to a programme of better standards, covering both conduct and competence, and would agree to report publicly on their progress each year.
The first task would be to define standards of good conduct that would be built on – and closely aligned with – the general principles being developed by the regulators. The new organisation would then work with individual banks and building societies to help drive these standards into all business activities. Over time, it would define the standards of competence that are required in specific roles in banking. This would be done by panels of industry practitioners.
The full text of the paper, including the 19 questions and the CISI’s response, is available at cisi.org/lambert.
AML and the FINCEN files: Do banks have the tools to do enough?
By Gudmundur Kristjansson, CEO of Lucinity and former compliance technology officer
Says AML systems are outdated and compliance teams need better controls and oversight
The FinCEN files have shown that it’s time for a change in AML. We must take a completely new approach in order to catch up with the speed of innovation in financial crime.
Despite what you’ll read in news headlines, we can’t lay all of the blame for anti-money laundering failures at the doors of the banks. The majority of compliance teams are doing what they can, and what they are being asked to do.
Historically, AML has, in large part been a box-checking exercise. Banks have weaved through mountains of false alerts, investigated cases, sent SARs, and then got on with business as usual. In some jurisdictions, banks can‘t even interfere with customers under investigation, in fear of jeopardizing cases.
But the sentiment towards banks’ responsibility in AML is changing. They are increasingly looking at AML as a corporate social responsibility issue and even a competitive advantage. Banks are looking to protect their brands from the horrors of an AML scandal, and as such are taking a more proactive approach.
They are also throwing a lot of money at the problem. Deutsche Bank claims to have invested close to $1 billion in improved AML procedures and increased its anti-financial crime teams to over 1,500 people. Most big-brand banks have a similar story to tell.
With reputation on the line, better AML controls can become good business.
So where does the problem lie?
From the thousands of SARs discovered in the FinCEN files, lack of customer oversight is evident. Banks need to establish a method of knowing their customers through their actions across the organization and beyond the organizational walls. By doing so, banks can better understand AML and compliance risk, which gives them the necessary tools to bar customers from doing business or limiting their activity.
While banks are striving to better enforce regulations by pouring money and resources into CDD and transaction monitoring, forming this type of intelligent customer overview might be the real solution. Proper Customer Due Diligence and customer risk monitoring can only be achieved by continuously tracking customer behaviour and transactional networks. With the latest developments in Artificial Intelligence – that is now possible.
But, the reality for compliance teams is they are hindered by outdated technology in their risk assessment and transaction monitoring systems and because of this, banks are fighting a steep, uphill battle against serious organised crime.
In 2019, the Bank of England issued a statement that claimed: “existing (money laundering) risks may be amplified if governance controls do not keep pace with current advancements in technological innovation.”
I know from my time working as a senior compliance technology officer that many traditional AML systems are inefficient, slow and labour intensive, and often lead to inaccurate outcomes. In fact, most of the systems pre-date the iPhone, so they are using last-generation technology and techniques to detect criminal activity.
In short, legacy AML systems are not fit-for-purpose. Legacy vendors built them for the box-checking world of the past, and they are focused on one suspicious transaction at a time – rather than looking at ‘bad actors’ in the financial system, and patterns in their behaviour.
As launderers constantly evolve their techniques to circumvent rule-based or simple statistical detection, the AML systems market has not kept up. There is a dire need for innovation.
Unless systems are updated, banks can continue to file suspicious activity reports (SAR), but if bad actors can conduct their business ‘as usual’ and shuffle money around the globe to hide its malicious origin, the effectiveness of a SAR is significantly diminished.
What’s the solution?
I believe we need to rethink our entire approach to AML. We need to empower compliance departments with better controls and oversight, and move away from outdated, traditionally rule-based systems and towards a modern, AI-enabled, behavioural approach.
While the bad guys have learnt how to evade rule-based systems, they find it extremely difficult to get around AI algorithms that search for anomalies in behaviour. The advancement of AI algorithms, especially in the field of deep learning, provide an opportunity for banks to detect more complex and evasive money laundering networks.
So the answer is to establish continuous automated risk monitoring and implement a workflow system that provides money laundering risk scores for customers.
The latest AI software could kickstart a new age of customer AML risk-based overview. Instead of relying on static and self-reported KYC data, AI systems can analyse behaviour over a period of time and compare it with peer-groups and past actions. It provides compliance teams with a continuous risk-rating of their customers, actor insights and summaries to facilitate efficient and thorough investigations, and an organizational-wide overview.
Recent advancements in AI have not only made the above possible, but also practical. Our latest Human AI models contextualize and explain the appropriate data, making it easier for banks to spot sophisticated crime.
By looking at AML not simply as a box-ticking exercise, but as a competitive advantage that can increase customers’ trust in their financial institutions, banks have a lot to gain. Moving towards behaviour-based AML systems is a move towards making money good.
Local authorities and business networks play a key role in small business success, and must be protected during COVID rebuild
- 23% of UK’s top performing businesses have been supported by local enterprise partnerships and growth hubs
- Similarly, 30% of Britain’s strongest businesses have obtained external finance in the last 3 years
- New findings come as part of an independent, holistic study into small business success, commissioned by Allica Bank to support British businesses
A new study, commissioned by business bank, Allica Bank, shows that a high level of engagement and interaction with external institutions and resources, is central to SMEs’ prospects of success.
The study analysed data from over 1,000 companies and ranked their success on a scale that evaluated factors including productivity, growth, consistency and outlook. To measure SMEs’ external engagement, survey respondents were asked whether or not they had engaged with local enterprise partnerships, growth hubs, or external financial advisers, as well as whether they had obtained credit or sought re-financing advice, in the last three years.
The benefit to small businesses in making the most of external resources are clear to see, with a quarter (23%) of the UK’s top performing SMEs – those in the top tenth percentile – actively engaging their local enterprise partnership or growth hub in the last three years. This compares to just 16% of all other small businesses. With such a clear benefit to businesses, these external networks must not only be protected but prioritised by any Government plans to rebuild the economy post-COVID.
Similarly, of the top performing SMEs in the country, 30% have obtained external credit in the past three years, compared to less than a quarter (24%) of all other businesses. This figure drops even further for the weakest performing businesses – those in the ninetieth percentile – where just 12% of businesses have obtained external financial support in recent years.
Chris Weller, Chief Commercial Officer, Allica Bank, said:
“At Allica Bank we understand that no two businesses are the same. We also know that no-one knows a business as well as its owners and managers. But they can’t be expected to be experts on everything.
“In the UK there is a wealth of external advice and support for small businesses and we urge each and every business out there to tap in to the external resources around them. Third-parties, such as business clubs, chambers of commerce, local enterprise partnerships and trade bodies, can be invaluable sources of advice and further resources. And although they have excelled in their given field, business owners may still lack knowledge in many other areas of running and growing a business. Therefore, engaging with third parties can give business owners the kinds of insight – and fresh perspectives – they need to succeed.
“As the economy and the country comes to terms with the impact of the COVID-19 pandemic, it is important these vital SME resources are protected and given the funding they need to continue providing invaluable insight and support to small businesses up and down the country.”
Allica Bank’s SME Guide to Success identified six ‘rules to success’ that were more likely to be displayed by top-performing SMEs compared to their counterparts. The full report contains a wealth of additional data and insight into each of these topics.
As part of its mission to empower small businesses, Allica Bank is making the findings freely available and running a series of free online workshops with relevant partner organisations for businesses to attend.
Do we really need banks? Yes, but digital transformation industry-wide is vital
By Charley Cooper is Managing Director at enterprise blockchain firm, R3
The Coronavirus crisis has taught us that we are capable of going digital quickly when we need to. As the banking sector faces a second wave, the ability for individual firms to grow and succeed will be reliant on better connectivity and efficiency at the industry-level, writes R3’s Charley Cooper.
The sudden and dramatic pace of change has been seen globally over the last six months. Decades of paper-based practices are being updated, digitised and overhauled as the whole word adapts to working online. As of today, countries are accepting “alternative arrangements” for original paper export certificates, New York is allowing notary services by video, and global banks are accepting “original” documents and acceptances by email.
Over the coming months, we will see this digital transformation extend from individual use cases and firm-level deployment to entire industries. And perhaps in no other industry is this more critical than in financial services, where the role of banks continues to be challenged because of the inefficiencies they face as a result of decades of siloed technology deployment.
While unquestionably an improvement over reliance on manual processes, regular “digital transformation” as implemented by a single bank has limited benefits. These typically include greater automation of business processes, acceleration in adoption of electronic channels, elimination of manual processes, standardisation of non-value-adding business practices and a focus on driving up data quality and speed of information flows.
Now consider achieving digital transformation at the level of the entire market, rather than on a bank-by-bank basis. Whilst a digital transformation project for a single bank might automate a business process between a front and back office, a digital industry transformation project might optimise the trading and settlement of the asset between buyer and seller and their custodians too.
Of course, such things have been attempted before. But there have been many failures and the successes are notable by how they have resulted in new dominant centralised providers – for example for market data, messaging or settlement. The advent of blockchain architectures showed us there was a new way to tackle the problem, one that worked with the grain of existing markets.
Done right, the prize is a huge “productivity dividend” as entire markets are unshackled from their analogue histories.
Tackling interbank reconciliation at the industry level
The Italian financial services industry provides a pertinent use case of digital industry transformation. 32 banks in Italy went live in March with one of the first real-world deployments of enterprise blockchain technology in interbank financial markets. 23 more banks went live in May, with further institutions scheduled to go live this autumn. Built by the Italian Banking Association, ABI, the Spunta Banca DLT app on R3’s Corda Enterprise platform tackles the market-wide issue of interbank reconciliation.
The traditional reconciliation process for interbank transactions in Italy—formerly governed by the “spunta” process— is notoriously complex. Resolving mismatches in transactions is a labour-intensive process, hampered by a lack of standardisation, fragmented communication and no “single version of the truth.” The Spunta Banca DLT app automates the reconciliation process and enables banks to pinpoint mismatches in interbank transactions quickly by sharing common data in a secure way.
Connecting such a large and diverse group of banks in a live environment to tackle a shared problem is a major milestone for digital transformation in the Italian banking sector, providing a glimpse into a brighter, more efficient and interconnected future for all financial markets.
The current crisis has accelerated the launch of digital technology for many use cases across a diverse range of sectors, but those that stand the test of time will be developed with an industry-level mindset, not firm-level.
It is now clear that the age of inter-bank optimisation is over – the path forward from this crisis will be paved by software that focuses on adding real value for entire markets, connecting banks to overcome the biggest challenges they share as an industry.
Banks must adapt and start thinking about technology in new and innovative ways if they are to retain their critical role in the global economy.
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