How much information can you gather by asking 35 questions? By requiring most firms subject to the money laundering regulations to fill out a new financial crime return (REP-CRIM), the Financial Conduct Authority is trying to ascertain the industry’s perceptions and procedures in respect of the prevention of financial crime.
The REP-CRIM form comprises 35 questions designed to inform the FCA about a firm’s exposure to financial crime, involvement with high-risk customers and compliance procedures. The explicit aim is to increase desk-based supervision by combining crime-risk data collection and notification.
“The FCA seems to fall between the two stools of quantitative and qualitative data collection” This is, of course, an admirable attempt to streamline the process for all concerned. Unfortunately, in seeking to obtain information in this manner the FCA seems to fall between the two stools of quantitative and qualitative data collection.
The simplicity of most of the questions on the REP-CRIM will only provide a very broad overview of the sector. The FCA has rowed back from its original proposals that sought more detailed information by requiring firms to submit their opinions on which jurisdictions were high risk and what types of fraud most affected their sectors.
Perhaps this was due to the recognition that meaningful answers to such queries would be better obtained by focused two-way engagement between the FCA and individual firms rather than through a standardised form.
A further weakness is that the FCA has not made it compulsory for firms to respond to opinion-seeking questions on which types of fraud are the most prevalent. Given the burden on firms and the complexity of the information required, it is likely that most businesses will not answer questions unless compelled, no matter how much the FCA may encourage them. As a result, the FCA will be denied the industry-wide perspective it presumably seeks.
Equally, given the questions are contained in an online form, with little possibility for follow-up questioning, any opinions gained are unlikely to provide any depth of insight. Thus, although making these questions optional is to be welcomed in itself, it will not assist the FCA in its quest for ‘better quality and more consistent comparable data’.
Similarly, one element of the REP-CRIM which was clearly designed to assess complex and subtle issues was the requirement for each firm to state how many relationships (with clients and agents) had been exited due to ‘reputational risk’. Following consultation this requirement was dropped. Although this will also be welcomed by the industry, it deprives the FCA of potentially very valuable information.
Perhaps the questions most likely to produce crude or misleading results are those that require the firm to state the number of staff with ‘financial crime roles’ and what proportion of those are dedicated to fighting fraud. Answers to these questions will, of course, be simple numbers. No information will be gathered about the quality, training or approach of these employees.
“It is difficult to see how such data will not lead to misconceptions on the regulator’s behalf” One firm might have a relatively small, empowered and highly effective compliance team, while another has a much larger team, poorly resourced and inhibited by internal procedures. Given that the FCA will not be provided with such details on the form, it is difficult to see how such data will not lead to misconceptions on the regulator’s behalf.
It is hard to avoid the impression that the FCA has fallen into the 21st century trap of believing that all wisdom and truth can be divined through a (relatively) cheap online survey. The FCA might argue that, apart from being inexpensive, such information is easily collated and converted into statistics. Those statistics, in turn, make good material for both press releases and consultations on further measures.
Overall, the REP-CRIM is an overly simplistic approach to tackling financial crime. Quantitative data must have a place in FCA decision-making, but the reality is that criminal threats facing the financial services industry are often highly complex and subtle. The relevant issues are not readily amenable to data-crunching, but rather to careful and considered dialogue with the industry. Fraudsters don’t purely ‘do things by numbers’, nor should the FCA.