Beware the Bank Supervisor’s Footsteps at the Door!
In a lending business the main risk that firms focus on is credit risk – the risk of loans not being repaid. What is often not high enough on the agenda is regulatory risk and the impending upgrade of regulation of lenders including BNPL (Buy Now Pay Later) next year in the UK. Regulators in other countries are considering similar changes. Managing the risk that you could be the next firm that the Financial Conduct Authority (FCA) or the Prudential Regulatory Authority (PRA) decides to investigate, is avoidable, unlike unexpected credit losses. And investors don’t like investing in firms that don’t avoid ‘avoidable’ risks. The fines for not following the rule books are high to act as a deterrent to others.
Mark Zuckerberg early on in his career told colleagues that the way to succeed in his business – Facebook – was to “move fast and break things”. In the finance industry, that approach does not work. The platforms used in finance must be resilient and not break under any normal circumstances. The FCA has taken many steps over time to strengthen its regulatory framework and to extend its bank and lender supervisory functions. Consequently, for firms that have hesitated over taking the necessary steps to ensure compliance with the rules, now is the time to ensure that they do not become subject to an FCA or PRA investigation. Heavy fines by a regulator are meant to hurt.
Several UK financial firms have fallen foul of either the FCA or the PRA (or both in the case of Metro Bank) in recent years. In December 2021, the PRA fined Metro Bank £5m for failing to act with due skill, care and diligence in relation to the regulatory reporting of its capital position and for failings in its regulatory reporting governance and controls. In November 2024, it was the FCA’s turn to fine Metro £24m after it found that between June 2016 and December 2020, the bank failed to have the right systems and controls to adequately monitor money laundering risks on more than 60m transactions. Metro agreed to resolve this matter i.e. to put in new controls, and so qualified for a 30% rebate on the fine which was reduced to £16m. In 2018 its share price was around £40 while today it is a little over £1. Part of the fall in share price was undoubtedly due to the impact of its compliance failures on investor perceptions.
In 2024 alone, some of the banks that paid large fines included: TSB fined £11m related to the unfair treatment of customers in the retail bank, mortgage and consumer credit sectors. Starling Bank was fined £29m relating to financial crime and breaching the conditions of a Voluntary Requirement (VREQ) in the retail banks sector. A Citigroup company was fined £27m for breaches of regulations related to wholesale conduct in the investment bank sector. Barclays Bank was fined £10m for breaches of listing rules relating to failure to disclose information in the issuer sector. Revolut has been having considerable difficulty obtaining a UK deposit talking license (as a bank) due to ongoing issues. As Fintech Weekly wrote in July 2025 “Whether its UK licence arrives in weeks or months, the message is clear — fintech’s next chapter will be built not just on innovation, but on regulation, execution, and trust.” As the FCA strengthens the supervision of firms to ensure that they have the right systems and controls to manage financial crime and other risks, that knock on the door could be expensive.
Buy Now Pay Later (BNPL)
The sector which is currently being disrupted by higher interest rates is soon going to be disrupted by the regulators. But first the problem of rising interest rates. In mid-August, one of the largest BNPL firms, Klarna, reported a net loss of $53mn for the three months to June 2025, up from a net loss of $18mn a year earlier. One problem is that relying on fees paid by merchants, instead of charging consumers interest, has been the key feature that distinguishes BNPL from other consumer credit products, for example credit cards and point-of-sale financing and so avoids regulation. But rising funding costs are hitting margins on interest-free BNPL products. As a result, the big players in this sector are turning also to the more traditional field of interest-bearing loans. The thin line between BNPL and traditional credit has become less obvious. Klarna, like others, has been moving away from offering short-term, interest-free instalments at retailers’ checkouts and moving to be a full-fledged neobank that offers debit cards and interest-bearing loans.
Many BNPL will chose not to convert to bank status but unfortunately, while they are almost free of regulation at present, the new rules that are being introduced in the UK next year are going to be essentially concerned with stopping unaffordable borrowing. Previously, firms providing BNPL agreements were not required to be authorised by the FCA or comply with the Consumer Credit Act 1974 (CCA). However, once the new proposed legislation comes into effect, it will bring BNPL agreements under regulation, removing the exemption that currently enables such activity to be unregulated. Legal firms specialising in this area note that firms will need to consider whether they require new systems to assess both customer affordability and credit risk. These assessments will need to ensure that BNPL providers can responsibly evaluate a consumer’s ability to repay without causing financial distress. If a BNPL firm converts to a company having a banking license, then compliance with regulation becomes a much larger task altogether.
So what is to be done? In this era of AI banking, platforms can undertake all the necessary compliance tasks automatically and flag up issues for a human to follow up. Using spreadsheets and an army of people to run the business no longer makes any economic sense. The costs and risks are simply too great. Making the switch to a platform that eliminates most human errors and reduces the cost of staff and the risk of a fine, is a no-brainer.
There are several features that any such system must have. We note just two below:
Client money: This system tracks activity in the individual’s holding account and will provide a daily (or real-time) reconciliation of amounts held in each of the clients’ holding accounts, comparing the total value of the individual accounts to the amount held in the actual segregated bank account - which must always balance. It is mandatory to do these reconciliations. It is also part of the requirements of wind-down plans. Such a system can also provide a day-book type analysis so the transactions going through the system also show the “system bank account” balances with the “actual segregated bank account”. Automated reconciliations make life so much easier and less costly for the business.
Anti Money Laundering (AML) checks are critical in this business. Some of the large fines we covered above relate to violations of the rules on AML checks. Ideally, documents required from a client relating to AML will already be set up in the system and activity automatically monitored. When triggered, requests to supply the necessary documents should be emailed automatically to the client with document upload links. Further automatically produced emails/SMS messages should chase-up on the request until they have all been uploaded to the system. If a ‘timeout’ occurs or ‘breach of conditions’ is imminent, the system should automatically warn admin of any potential AML fail so escalation is immediate.
Just two examples of how well-designed systems can prevent breaches and warm the hearts of the regulators.
Will the lure of AI and hyper-automated processing encourage more firms to invest in technology to avoid the dreaded knock on the door? We’ll see.
Ends
Author: Professor Brian Scott-Quinn
Professor Brian Scott-Quinn is Chair of the International Capital Markets Association (ICMA) Centre, the business school for financial markets which he founded at the University of Reading, Henley Business School, in 1991 after a career in the City of London loan, bond and equity markets. He was Chair of the Audit Committee and on the board of Allica Bank until 2018 and is Non-Executive Director at Madiston plc, developers of digital lending and banking technology.
