Balancing AML risk, financial inclusion, and customer experience in times of economic stress

The 2007-9 financial crisis showed that economic downturns drive up certain types of financial crime.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

In our global compliance survey for 2023, we at ComplyAdvantage asked global senior compliance decision-makers how their compliance teams are responding to the uncertain global economic environment. In response, 99 percent of firms said they were reassessing their risk appetite.

Indeed, the impact of failing to mitigate financial crime is severe – not just in terms of regulatory penalties, but more importantly in terms of the human costs of the behaviours it enables, like trafficking, forced labour, and environmental crimes. But in light of regulations also protecting customers and financial inclusion, is a more conservative risk appetite the whole answer?

Balancing risk and financial inclusion

As illustrated by the imminent Consumer Duty in the UK, firms are expected to walk a careful line, avoiding treating customers unfairly while also taking reasonable AML risk management actions that are ultimately in consumers’ best interest. As an example of this tension, banks often feel pressure in times of economic stress to engage in 'de-risking' activity. This refers to terminating relationships with a particular category of customer – or refusing to enter into such relationships in the first place – due to a perceived risk associated with these categories.

But numerous regulators have cautioned against de-risking activity, with the European Banking Authority (EBA) noting that de-risking "can be unwarranted and a sign of ineffective ML/TF management". So how can banks balance a well-calibrated AML risk appetite with concerns over financial inclusion and customer courtesy?

Risk vs. inclusion: practical tips

Beyond offering lower-risk products, banks should consider the data management benefits artificial intelligence and machine learning-based solutions can deliver. Many firms are concerned with the cost-benefit ratio of managing potentially higher-risk customers. But machine learning can, for example, tap into existing data points while dynamically adding to the picture as the customer relationship develops. This supports more customised risk responses sensitive to specific customer situations. It also makes balancing risk management practices with financial inclusion more cost-effective – and efficient – than ever before.

You can find more insights from ComplyAdvantage’s global compliance survey in its The State of Financial Crime 2023.

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