Good Practice: Customer Risk Assessments Frameworks

Good Practice: Customer Risk Assessments Frameworks

Customer Risk Assessments (CRAs) are fundamental to running a compliant business, preventing financial crime and a priority of the Financial Conduct Authority (FCA). They help financial institutions identify, assess and mitigate the risks associated with their customers and ensure that they have appropriate anti-money laundering/counter terrorism financing (AML/CTF) measures in place.

Most firms today use models based on an assessment of risk factors such as customer information; geographical aspects such as residence, incorporation or location of the premises; products and services, estimated or transactions; and the distribution channel. The risk categories have a risk weighting assigned to each and together are used to calculate a risk-rating score and establish customer’s risk profile.

Regulators around the world, including the FCA, are paying more attention to risk assessments and encouraging innovative approaches to combat financial crime. So how can firms improve their risk assessments without overburdening their compliance teams?

Use a Holistic Approach

As frameworks adapt and grow with a business, there is a tendency for them to become too complex. Different lines of business might use different risk-rating scales and different risk factors might be used for different market segments. This can reduce the accuracy of risk scores as well as increasing the complexity, cost of monitoring and review.

Firms can reduce these issues by taking a more holistic approach to their Customer Risk Assessments, whilst still recognising unique elements represented by various products, services or customer types. By aligning all business areas to a consistent set of risk factors, firms can then determine the specific factors that are relevant for each line of business. Doing this not only makes risk assessments more effective, but it also increases efficiency across the business.

Build a proportionate framework

More controls do not necessarily mean better protection from financial crime. Firms should decide which risks they are willing to accept versus those that will be outside their risk appetite. Additionally, firms must evaluate effectiveness of their control mechanisms to ensure financial crime risks are appropriately managed.

Firms should also look at the impact of controls on the customer experience, particularly in respect of advantages of their service. For example, are there alternative solutions and controls that meet regulatory requirements whilst lessening the impact on the customer?

Be Proactive

Firms need to do more than react to the regulatory requirements and attention from regulators. Anticipating risks and protections, firms should be continuously reviewing and updating their approach.

Keep the assessments up to date

Assessing a risk of a business relationship, is one of the key parts of customer due diligence. It is important that firms review the assessment on a regular basis and avoid a stereotypical approach of only risk rating at the start of the relationship. Customer circumstances can change at any point during the course of the relationship and firms are responsible to identify these changes and re-assess how they may impact the risk rating initially assigned.

Make the assessments meaningful

Whilst the assessment process itself is important in understanding a true customer risk profile, it is equally important to use a risk-based approach in using the results of the assessments. For example, what is the difference in KYC/KYB approach for a customer rated as low risk, as opposed to a high-risk customer.

Review Data Quality

Poor data quality is a significant issue for customer risk-rating models. Incorrect know-your-customer (KYC) information, missing information, and erroneous business descriptions impair the effectiveness of screening tools and needlessly raise the workload of compliance teams.

Regular reviews on the quality of data, and particularly false positives, can help firms continuously improve the quality of their data and the efficiency of their monitoring.

How 123signed can help

In light of the weaknesses identified in the implementation of AML/CFT measures by payment institutions, it is crucial to seek solutions that address these vulnerabilities effectively. 123signed, a leading provider of AML compliance solutions, offers a comprehensive suite of services specifically tailored for payment institutions. Our advanced transaction monitoring system, streamlined customer due diligence processes, and expert guidance, empower payment institutions to strengthen their AML/CFT capabilities. We enable payment institutions to enhance their monitoring capabilities, identify and flag suspicious transactions effectively, and prevent illicit funds from entering their systems.

We also work alongside our partners at Neopay to offer a wide range of services that empower payment institutions to strengthen their financial crime efforts. From tailored risk assessments and comprehensive training programs to regulatory guidance, compliance and financial crime audits, and ongoing support, we provide the necessary tools to enhance your firm’s resilience.

Discover how we can bolster your financial crime prevention strategies by contacting our team of experts today.