This is an updated extract from a speech on Compliance and Financial Crime given by Matt Carter, senior recruitment consultant at Broadgate Search, at an ICA conference in Birmingham on 21st February 2017
Financial services and associated regulated businesses are facing unprecedented challenges as they battle to ensure regulatory compliance in a global world and to ensure their business and products are protected from the risks associated with the rise in financial crime.
As a senior recruitment consultant at Broadgate Search, a specialist Governance recruitment agency with offices in London and Dublin, I have seen first-hand the growth in demand for skills in this specialist financial crime sector.
I head up the team that looks after appointments in the Midlands and the North of the UK. The ICA has asked me here to provide information and insight into the area of Compliance and specifically Financial Crime.
Today, Birmingham is thriving economically and culturally.
According to Business Birmingham, the city of Birmingham has the largest regional financial and professional services hub in the UK, employing nearly 95,500 people in over 8,400 companies. The city also has the one of the largest legal services clusters in Europe and the largest accountancy clusters outside London.
The city of Birmingham is one of only four UK cities with over 10,000 Credit and Insurance professionals, and the region is home to insurance operations such as AON, Wesleyan & Marsh. It is in fact the second largest insurance market in Europe.
In Greater Birmingham, 30 per cent of firms are in the BPFS sector. It is the largest regional BPFS hub in the UK, bringing in 23 million (25 % of GVA). In the wider West Midlands, over 133,000 people are employed in the sector; many of them are SMEs with the flexibility to support diversity and innovation.
Among the big names based here are The Islamic Bank of Britain (the country’s first sharia compliant retail bank), Deutsche Bank, PwC, and Wragge and Co.
HSBC is still on track to move its retail bank operations here and HM Revenue and Customs plans to move its regional hub to Birmingham City Centre by 2019 when it will be employing 3,000 people.
The commercial property market – a key pointer to the health of a local economy – is buoyant. It is reckoned commercial rents are about 50 per cent lower than London and at the end of last year the international property firm Knight Frank reported that take up on office space in Birmingham was 18 per cent higher than the long term trend. Birmingham, the report said, was one of the ten best-performing European cities for capital growth.
The city Centre has been – and continues to be – transformed. Mixed developments, both commercial and residential with shops and restaurants to support cafe culture have arrived, and the economic plan for the wider city will see more dramatic transformation in the not too distant future.
Along with the growth in financial services as a whole we, at Broadgate Search, are seeing a dramatic growth in all roles which cover the broad remit of compliance and specifically the area concentrating on financial crime.
All commentators immediately point to the increase in regulation in this area – the need for compliance with MLA and the new GDPR regulations, for example. These regulations will not, says the government, lessen when we leave the EU.
However, regulation appears to be only part of the story. The truth is that the need for financial crime specialists is also due to the extraordinary growth in financial crime itself – which knows no national boundaries and is, according to all experts in the field, growing in an unprecedented way here, in the UK, and globally.
The figures are huge. GCHQ reckons that fraud in financial services costs the taxpayer £5.4 billion a year.
The National Crime Agency (NCA) estimates that billions of pounds of suspected proceeds of corruption are laundered through the UK each year. This money laundering by serious and organised crime has social and economic costs estimated at £24 billion annually. The Home Office has declared that money laundering can undermine the integrity and stability of our financial markets and institutions.
These are massive figures and frightening predictions for financial services and require massive, system wide responses from financial services.
Reputational damage can, of course, be counted in national newspaper headlines and huge fines but the accumulated effect of small systems failures because of human error and a lack of robust protective systems can be just as significant to the reputation of - and customer confidence in - a financial institution. The strength of a Compliance department is crucial.
In October 2015, the first national risk assessment of money laundering was published by the government. It was in many ways a wakeup call, identifying that the same factors that make the UK an attractive place for legitimate financial activity – its political stability, advanced professional services sector, and widely understood language and legal system – also make it an attractive place through which to launder money and commit fraud.
The National Risk Assessment report of 2015 described the effectiveness of the supervisory regime at “inconsistent” with “room for improvement across the board.”
It identified that those working in the regulated sector “may aid those involved in money laundering, either unwittingly, or through negligence or non-compliance. Non-compliant or negligent professionals have the potential to cause significant harm by facilitating money laundering and causing reputational damage to their profession.”
Evaluating the risk levels of each sector in Financial Services, the report found that banks, accountancy, legal services providers, money services companies and e-money systems were at high or medium structural risk.
Estate agents with customers from all over the world in some cases, also feature in the 2015 report as being at risk from fraud and money laundering. Recently, at Broadgate Search, we are seeing increased demand from this sector - to fill new posts designed both to comply with regulation and to protect against potential money laundering.
Key vulnerabilities in the banking sector identified in the report were systemic failings in banks AML/CFT control frameworks as well as the introduction of products and services without adequate controls against money laundering.
Specific threats identified in the regulated sector included the use of “Bank Quick Drop” in retail banking where, in one case, £250 million had been laundered by one gang. A robust AML/CFT control framework set up under a robust Compliance team could have prevented this vulnerability.
Due diligence was found to be very varied in correspondent banking particularly in smaller banks. Transaction monitoring was also inadequate in many institutions.
Regulated businesses, the FCA has argued, need systems and controls in place to identify and where necessary verify their customer. If the customer is a foreign PEP (Politically Exposed Person), the business is required to carry out enhanced due diligence (EDD). Businesses may also carry out EDD on other customers, subject to their own risk assessments. EDD measures include having approval from senior management for establishing a business relationship with that person; taking adequate measures to establish the source of wealth and source of funds; and conducting enhanced ongoing monitoring.
The UK has the highest concentration of e-money issuers in the EU. They are convenient, efficient and offer new business opportunities. However, near or absolute anonymity can be readily achieved which presents an identified crime risk.
Internationally, says the report, the UK is the world’s leading exporter of financial services with a trade surplus of $71 billion in 2013. In 2013, the UK accounted for 41% of global foreign exchange trading, well ahead of the USA, Japan and Singapore.
What does the picture look like in 2017? It can be summed up as follows: more frauds are being detected, more cyber attacks – on a larger scale than we have seen in the past - are occurring, but better systems to combat financial crimes are coming into play.
Regulated business is now actively building up teams and developing new protective measures to counter what experts summed up as the inadequate systems of the past. Governance structures and oversight of AML/CFT, risk assessment processes, inadequate IT systems, transaction monitoring, due diligence on correspondent banks, sources of wealth and funds are all now in the glare of the spotlight and facing huge and ongoing overhauls.
We, at Broadgate Search, have seen the demand for Governance and associated financial crime professionals across all sectors and in all specialities rise to an all time high. The skills required for a team to be effective are wide: IT and software skills, regulatory knowledge, financial product experience are just some of the areas of expertise in demand. In our experience, it is the right mix of expertise inside a team that will ensure the success of a compliance operation within any regulated business. Good communication between team members is vital. Similarly, effective communication upwards, including to board level, and downwards, to the coal face, will cement the effectiveness and success of that team both in terms of regulatory compliance and in combating financial crime.
There has been a 55 per cent rise in the value of fraud detected and going through the courts, say accountants at KPMG. Royal Bank of Scotland, Lloyds, HSBC and Tesco Bank have all been a target recently.
IT professionals are clearly needed to thwart such attacks on financial institutions and to build systems to prevent such attacks in the first place. As demand rises, we, at Broadgate Search, are seeing a shortfall in professionals with the right expertise. Demand for contract roles is also high. This shortfall is a global phenomenon.
With the arrival of GDPR, the reporting of financial crime will change. Once fully implemented in two years’ time, there will be a legal responsibility on financial institutions and all regulated business to report any breach in data security.
GDPR has huge implications, clearly, for data protection and will inevitably lead to further investment in robust systems to protect against financial crime. It is inevitable because almost all financial crime incidents will involve some kind of breach of data protection and every breach will have to be reported in full. Failure to report a breach or any non-compliance with the regulation could result in a fine of up to 20 million Euros or four per cent of annual worldwide turnover.
Crucially, the Information Commissioners’ Office highlights the significant addition of accountability to data protection rules. The GDPR requires you to show how you comply with the principles – for example by documenting the decisions you take about a processing activity.
The Chancellor, Philip Hammond, at the recent opening of the new National Cyber Security Centre, revealed that the Centre has blocked 34,550 potential attacks on government departments and members of the public in the past six months, which is about 200 cases a day. He has called on the private sector to join the battle against cyber attacks.
Birmingham is well placed to provide the expertise needed in the future and is fully engaged in that battle.
Greater Birmingham is a hotspot for Fintech companies, for tech start-ups and SME's, for digital programme development centres and large, operational infrastructure functions. Their expertise is increasingly providing those services to international operations.
At Birmingham University, there is an MSc degree in Cyber Security which has received provisional GCHQ accreditation – one of only ten such courses in the country, and the university has been established as an academic Centre of excellence in cyber security research. The School of Computer Science is rated third in the Russell Group for Computer Science and Information Systems.
At Birmingham City University, the Centre for Cyber Security was established three years ago, to combat cyber threats with new security and privacy practices.
The global Fintech company, Lombard Risk Management, which has set up a new technology Centre in Birmingham, has specifically cited the rich pool of relevant expertise to be found in the city as a key reason for its investment in Birmingham.
To conclude, the need for robust compliance policies and the need to counter rising financial crime have resulted in unprecedented national demand growth. We, at Broadgate Search, are experiencing this demand for skilled personnel first hand.
For Birmingham, the future for financial services as a whole looks excellent. In the specific areas of Compliance and the skills to target Financial Crime, the future looks equally exciting.