Late last week, the UK Financial Conduct Authority (FCA) released a report on the drivers and impacts of derisking by banks and other financial institutions. Here at CGD, we have also been focused on the consequences of derisking by financial institutions for money service businesses, non-governmental organizations, and correspondent banking relationships in poor countries. Our report, Unintended Consequences of Anti-Money Laundering Policies for Poor Countries—the product of a working group chaired by Clay Lowery—was released last November. We’re very happy that the FCA report echoes many of our findings. It’s another piece of evidence that suggests regulators are waking up to the fact that banks in wealthy countries are increasingly reluctant to offer services to banks in poor countries and to other businesses that transact with poor countries.

The FCA report successfully underscores the lack of clarity of the risk-based approach. The authors write: 

There is…no doubt that banks are trying to do what they believe is expected of them under the risk based approach (RBA) to AML/CFT, in reducing the extent to which their services are abused for financial crime purposes, by on occasion exiting relationships that present too high a perceived risk of such abuse, regardless of the costs of compliance. These perceptions of risk stem from their own judgments, in part reflecting the signals emitted (or judged to be emitted) from the range of regulators and prosecutors who are salient to their institutions, and also the global rankings from the commercial agencies involved in risk judgments.

Moreover, the report notes the lack of an agreed upon assessment of financial crime risk, which has contributed to the phenomenon of derisking:

Achieving the perception of legitimacy and fairness of the regulatory system requires consistency and transparency when dealing with each type of customer. Established risk-based approaches to financial crime identify the risk associated with various factors such as sector, occupation, types of business; geography and jurisdiction risk; political risk; distribution channels; and product or services that customer requires or uses. However, by contrast to some other banking risks like consumer credit loss and fraud risks, there is not yet a generally agreed quantitative assessment methodology for assessing financial crime risk and it is difficult to determine to what extent the data are sufficient for this purpose, other than to make a broad subjective assessment.

The authors also point out the varying ability of banks to “score” their customers:

Banks vary in their ability to ‘score’ particular customers, depending on the bank’s size, resources, geographic coverage and other factors. Decisions on what financial crime residual risks fall within acceptable parameters for a particular bank may be taken through an expression of financial crime risk appetite and/or as an output from customer risk assessment tools, using the broad risk factor categories.

Outputs from customer risk assessment tools will group customers into risk categories (e.g., at the simplest level, High, Medium, Low). De-risking can also come about by setting scores from these tools above which the customer is defined to be beyond financial crime risk appetite, or to require special consideration. Although this would be regarded as ‘case-by-case’ derisking by the banks, it almost inevitably means that the customers identified share common characteristics, such as sector, business type and country affiliations. From the point of view of those affected by derisking, this would give the impression of a wholesale process.

And finally,​ citing the CGD report, the FCA indicates that its findings are consistent with the prevailing narrative:

Our findings are that the most consistent impacts have been in correspondent banking, where all banks report a net reduction and among MSBs (at some banks). This confirms the narrative found in much of the literature on de-risking, which has tended to focus on correspondent banking, MSBs and charities as sectors at risk.

The FCA has stated that it will work with financial institutions to help them make better assessments of risk, among other improvements.