Already, financial institutions in the UK are familiarizing themselves more closely with the concepts and functions of “ring fencing” – a type of asset protection scheme that is
soon to be required by law and which seems to be overlapping a lot of different channels in terms of its effects on risks and protections.
The initial issue of the market downturn affecting increased fraud may have first shown itself all the way back in 2008. I can remember noticing fraud-related upticks during my tenure at a UK bank during the market downturn – at the time, not quite realizing the long term effects of what was beginning to appear. I just remember quite vividly that my calendar was getting awfully crowded with special meetings relating to market movements and fraud-related risk.
So, here we are nearly ten years later and we are still seeing the impact from the 2008 global financial downturn and subsequent implementation of laws to further secure the banking industry. As we have learned, many of these actions overlap fraud protections to a certain degree, and among those include ring-fencing related issues. By January 2019, in fact, the United Kingdom will begin to enforce new ring fencing laws that will require banks to create separate legal entities, in particular separating the retail banks from investment banks as a form of market-related protection.
But what is the connection between fraud detection and prevention and ring fencing? In fact, there is a great deal of connection – ring fencing laws and implementation have a considerable impact on the payments world, and that is at the heart of where fraud detection lies. One critical impact is that millions of customers will have their sort code changed, which would affect the account holder and the payee.
Sort codes in the United Kingdom banking system are used hand in hand with an account number, and they are critical for making sure money moves to the correct account. In other words, if my sort code changes, and/or the person I want to make a payment to sort code changes, then fraud detection models need to understand that this account is still me, and not a new customer. And it works the opposite way if the person I am paying has a change in sort code, it is still “them.” And, in some cases, the account number of the customer and payee may change, which can create a double impact.
Fraud detection models work on artificial intelligence and rely on accessing the history of how customers normally behave and how fraudsters are also behaving. This history, which depends on customer data and payments data, is rich in the type of information needed for good detection, and sort codes and account numbers are part of this picture. Fraudsters will be ready to explore these changes, just like we have seen with faster payments in the UK, and with the rise of social engineering globally. In the United Kingdom, fraud management executives, data science teams and payment teams will need to prepare now for this upcoming change.
What should financial institutions in the UK do now to begin preparations?
- Understand from end-to-end any new or anticipated data changes in payments processes that could be implemented during ring fencing implementation.
- Work with your fraud hub providers to ease the impact on any AI or detection models.
- Prepare for some operational and risk related impact as any large regulatory change always has early lessons learned and corrections.
Don’t be the last to make sure your fraud systems are sound and up to date. As we have certainly seen, the lack of preparation and adaptation to potential new regulation always causes fraud to migrate right to your institutions. Don’t let that happen – and put in your own “fence” to block future fraud.