Transaction Monitoring Systems: Meeting FCA's Updated Expectations

Introduction: Transaction Monitoring Under Heightened Scrutiny

Transaction monitoring sits at the heart of every firm's financial crime framework. It is the mechanism through which suspicious activity is identified, escalated, and reported—serving as a critical line of defence against money laundering, fraud, and terrorist financing. Yet recent enforcement action demonstrates that many firms continue to struggle with implementing effective monitoring systems that meet regulatory expectations.

The Financial Conduct Authority's updated Financial Crime Guide (FCG), revised in November 2024, provides clearer direction than ever before on what the regulator expects from transaction monitoring arrangements. Combined with the FCA's confirmation that financial crime remains a top enforcement priority through 2030, firms have both the guidance and the imperative to strengthen their systems.

This article examines the FCA's current expectations for transaction monitoring, draws lessons from recent enforcement action, and provides practical guidance for firms seeking to enhance their monitoring capabilities—whether through traditional rules-based approaches or innovative AI-driven solutions.

The Regulatory Framework

Financial Crime Guide Update: November 2024

The FCA's Financial Crime Guide was substantially updated in November 2024, consolidating previous guidance and providing enhanced direction on transaction monitoring. The revised guide reflects the regulator's evolving expectations in light of technological advancement and the increasingly sophisticated methods employed by financial criminals.

Key updates relevant to transaction monitoring include:

Risk-based approach emphasis: The guide reinforces that monitoring intensity should be proportionate to the risk presented by individual customers and transaction types
AI and innovative approaches: New guidance explicitly addresses the use of artificial intelligence and machine learning in monitoring systems
Effectiveness measurement: Enhanced expectations around how firms should assess whether their monitoring is actually achieving its objectives
Good and poor practice examples: Expanded illustrative examples to help firms benchmark their arrangements

Financial Crime: A Strategic Priority Through 2030

The FCA has consistently signalled that financial crime prevention remains among its highest priorities. The 2024-2030 Business Plan confirms this focus will continue, with particular emphasis on:

Preventing fraud and protecting consumers from financial harm
Combating money laundering through effective firm-level controls
Disrupting serious organised crime that exploits the financial system
Ensuring firms implement adequate and effective systems and controls

For compliance professionals, this sustained priority means transaction monitoring deficiencies will continue to attract supervisory scrutiny and, where warranted, enforcement action.

Lessons from Enforcement: Nationwide Building Society

The FCA's December 2025 fine of £44.1 million against Nationwide Building Society serves as a stark reminder of the consequences of inadequate transaction monitoring. The fine—the largest of 2025—arose from systemic weaknesses in financial crime controls affecting all personal current account customers over a five-year period.

What Went Wrong

The FCA's findings highlighted several specific monitoring failures:

Inadequate transaction monitoring calibration: Nationwide's systems were not appropriately calibrated to detect suspicious patterns given the scale and nature of its customer base. Alert thresholds and monitoring rules had not evolved in line with business growth.

Insufficient resource allocation: The compliance function lacked adequate resources to investigate the alerts generated, leading to backlogs and delayed reviews.

Poor documentation and rationale: Where decisions were made not to file Suspicious Activity Reports (SARs), the rationale was often inadequately documented, making it impossible to demonstrate that appropriate consideration had been given.

Failure to act on known weaknesses: Internal audits and risk assessments had identified control gaps that remained unaddressed for extended periods.

The Key Message

Nationwide's case underscores that transaction monitoring is not a static compliance exercise. Systems and controls that may have been adequate when implemented can become deficient as the business grows and risks evolve. The FCA expects firms to continually assess the effectiveness of their monitoring and make necessary adjustments.

What the FCA Expects: Core Requirements

Drawing on the Financial Crime Guide and enforcement experience, we can identify the FCA's core expectations for transaction monitoring systems.

1. Risk-Based Design

Transaction monitoring must be designed around the firm's specific risk profile. This requires:

Customer risk segmentation: Higher-risk customers should be subject to more intensive monitoring. Risk factors include customer type, geographic exposure, product usage, and behavioural patterns.

Product and channel considerations: Different products and channels present varying risks. Cash-intensive businesses, international transfers, and digital channels may require bespoke monitoring approaches.

Dynamic adjustment: As the business evolves, monitoring parameters should be reviewed and adjusted accordingly.

2. Appropriate Thresholds and Rules

Whether using rules-based, statistical, or AI-driven monitoring, the FCA expects:

Justified parameters: Firms should be able to explain and evidence why particular thresholds and rules have been selected. "Industry standard" is not sufficient justification—parameters must reflect the firm's specific risk profile.

Regular tuning: Monitoring systems should be regularly reviewed and tuned to maintain effectiveness. This includes analysing both false positives (legitimate activity incorrectly flagged) and false negatives (suspicious activity missed).

Coverage assessment: Firms should periodically assess whether their monitoring rules cover the relevant typologies for their business model and customer base.

3. Effective Alert Investigation

Generating alerts is only the first step. The FCA expects robust processes for investigating and actioning alerts:

Timely review: Alerts should be investigated within reasonable timeframes. Backlogs indicate inadequate resourcing.

Skilled investigators: Staff reviewing alerts must have sufficient training and experience to identify genuinely suspicious activity.

Clear escalation paths: Where investigation reveals concerns, there must be clear processes for escalation and SAR filing decisions.

Quality assurance: A proportion of alert dispositions should be subject to independent review to ensure consistency and accuracy.

4. Comprehensive Documentation

Documentation expectations are particularly stringent:

Decision rationale: All SAR filing decisions—whether to report or not—should be documented with clear reasoning.

Audit trail: The investigation process should be fully documented, enabling subsequent review.

System changes: Any changes to monitoring rules, thresholds, or parameters should be recorded with justification.

AI and Innovative Approaches: New Guidance

The November 2024 FCG update provides significant new guidance on using artificial intelligence and machine learning in transaction monitoring. The FCA has adopted a technology-neutral stance—it does not mandate any particular approach, but sets expectations that apply regardless of the technology employed.

The FCA's Position on AI

The regulator acknowledges that AI and machine learning can enhance transaction monitoring effectiveness through:

Improved detection of complex or unusual patterns that rule-based systems might miss
Reduced false positive rates, allowing investigative resources to focus on genuine concerns
Adaptive learning that responds to evolving criminal methodologies
Network analysis capabilities that identify connected suspicious activity

However, the FCA is clear that innovative technology does not reduce compliance obligations. Firms using AI-driven monitoring must still demonstrate that their systems are effective and that decisions can be explained.

Good Practice: AI Implementation

The FCG identifies good practice for firms implementing AI-based monitoring:

Explainability: Firms should be able to explain, at least at a general level, how their AI systems identify suspicious activity. "Black box" approaches that cannot be understood or explained are likely to face regulatory challenge.

Human oversight: AI should support, not replace, human decision-making. Final SAR filing decisions should involve appropriately skilled human review.

Ongoing validation: AI models must be subject to regular validation to ensure they remain effective as criminal methodologies and customer behaviours evolve.

Bias and fairness monitoring: Firms should assess whether AI systems produce discriminatory outcomes and take steps to address any identified bias.

Governance framework: Implementation of AI monitoring should be subject to appropriate governance, including senior management oversight and board reporting.

Poor Practice: AI Implementation

Conversely, the FCG warns against:

Implementing AI solutions without understanding their underlying methodology
Failing to validate AI models after deployment
Over-reliance on vendor assurances without independent assessment
Reducing investigative resources on the assumption that AI will "solve" monitoring challenges
Inadequate documentation of how AI-driven alerts are investigated and resolved

Testing and Evaluation: Demonstrating Effectiveness

One of the most significant expectations in the updated guidance is around testing and evaluation. The FCA expects firms to actively demonstrate that their transaction monitoring is effective, not simply that systems are in place.

Assurance Testing

Firms should implement regular assurance testing of their monitoring systems:

Back-testing: Reviewing known suspicious cases (including SARs filed) to confirm that monitoring systems would have generated appropriate alerts.

Gap analysis: Assessing whether monitoring rules cover known and emerging typologies relevant to the firm's risk profile.

Threshold testing: Analysing whether current thresholds remain appropriate given changes in transaction patterns and values.

Below-threshold analysis: Periodically reviewing activity below alert thresholds to identify potentially suspicious patterns that are not being captured.

Effectiveness Metrics

The FCG encourages firms to develop meaningful metrics for assessing monitoring effectiveness:

Alert-to-SAR conversion rate: The proportion of alerts that ultimately result in SAR filings. Very low conversion rates may indicate excessive false positives; very high rates may suggest thresholds are too conservative.

Time to investigate: Average and distribution of time from alert generation to disposition. Extended investigation times may indicate resourcing issues.

Coverage metrics: Assessment of what proportion of transactions and customers are subject to monitoring.

False negative indicators: Where suspicious activity is identified through means other than automated monitoring (e.g., law enforcement enquiries), this should trigger review of monitoring coverage.

Independent Review

The FCA expects transaction monitoring arrangements to be subject to independent review:

Internal audit: The internal audit function should periodically assess the design and operating effectiveness of monitoring controls.

Compliance testing: The compliance function should conduct ongoing monitoring of alert investigation quality.

External assurance: For larger or higher-risk firms, periodic external review of monitoring arrangements may be appropriate.

Manual Monitoring: Not Forgotten

While much attention focuses on automated systems, the FCG also addresses manual monitoring. For smaller firms or specific transaction types, manual monitoring may be appropriate or necessary.

When Manual Monitoring Applies

Manual monitoring may be suitable where:

Transaction volumes are low enough to permit meaningful human review
Relationship-managed customers warrant individual oversight
Certain transaction types require expert judgement that cannot be automated
As a supplement to automated monitoring for high-risk scenarios

Expectations for Manual Monitoring

Where manual monitoring is employed, the FCA expects:

Clear procedures: Documented processes setting out what is reviewed, by whom, and how often.

Adequate resourcing: Sufficient trained staff to conduct reviews within reasonable timeframes.

Consistent application: Mechanisms to ensure reviews are conducted consistently across reviewers.

Documentation: Records of reviews conducted and any issues identified.

Escalation processes: Clear paths for escalating concerns identified through manual review.

Good Practice vs Poor Practice: A Summary

The FCG provides extensive examples of good and poor practice. Key contrasts include:

Good Practice

Transaction monitoring calibrated to the firm's specific risk profile and customer base
Regular review and tuning of monitoring parameters based on effectiveness data
Adequate, trained resources for alert investigation with clear escalation paths
Comprehensive documentation of decisions and rationale
Board and senior management oversight with meaningful MI
Independent assurance testing of monitoring effectiveness
For AI systems: explainability, human oversight, ongoing validation, and bias monitoring

Poor Practice

Generic monitoring rules not tailored to the firm's risk profile
"Set and forget" approach without regular review and adjustment
Alert backlogs and delayed investigations due to inadequate resourcing
Insufficient documentation of investigation outcomes and SAR decisions
Senior management disengagement from financial crime controls
No testing of whether monitoring is actually detecting suspicious activity
For AI systems: unexplainable decisions, absence of human oversight, no ongoing validation

Practical Steps for Compliance Teams

For firms seeking to strengthen their transaction monitoring arrangements, we recommend the following actions:

Immediate Priorities

Review against FCG guidance: Benchmark your current monitoring arrangements against the updated Financial Crime Guide, identifying gaps.
Assess effectiveness data: Analyse your alert volumes, conversion rates, and investigation timeframes to identify potential issues.
Document your approach: Ensure you can explain and evidence why your monitoring parameters are appropriate for your risk profile.
Address resource constraints: If investigation backlogs exist, develop a plan to address them—whether through additional resource, technology, or process improvement.

Medium-Term Actions

Implement assurance testing: Develop a programme of regular testing to demonstrate monitoring effectiveness.
Enhance MI and reporting: Ensure senior management receives meaningful information about monitoring performance and effectiveness.
Consider technology options: Assess whether AI or other innovative approaches could enhance your monitoring capability.
Train your team: Ensure investigators have current knowledge of typologies and investigation techniques.

Ongoing Requirements

Regular review cycle: Establish a documented process for periodic review of monitoring parameters.
Stay current: Monitor FCA communications and enforcement actions for evolving expectations.

How MEMA Can Help

Effective transaction monitoring requires a combination of regulatory understanding, technical expertise, and operational discipline. At MEMA Consultants, we support firms across the financial services sector in designing, implementing, and enhancing their transaction monitoring arrangements.

Our services include:

Transaction Monitoring Reviews We conduct comprehensive assessments of your monitoring systems, benchmarking against FCA expectations and identifying enhancement opportunities.

FCG Gap Analysis We review your financial crime framework against the updated Financial Crime Guide, providing clear recommendations for achieving compliance.

AI Implementation Support For firms considering AI-based monitoring, we provide guidance on meeting regulatory expectations for explainability, validation, and governance.

Effectiveness Testing We design and execute assurance testing programmes to demonstrate that your monitoring is achieving its objectives.

Resource and Operating Model Assessment We assess whether your current resourcing and operating model is appropriate for your risk profile and transaction volumes.

Training and Development We deliver tailored training for alert investigators, compliance teams, and senior management on regulatory expectations and best practice.

The £44 million Nationwide fine demonstrates that transaction monitoring failures will attract significant regulatory consequences. By taking proactive steps to assess and enhance your monitoring arrangements, you can protect your firm, your customers, and your reputation.

Ready to strengthen your transaction monitoring? Contact our team to discuss how MEMA Consultants can support your compliance objectives.

This article is intended for general information purposes only and does not constitute legal or regulatory advice. Firms should seek professional guidance tailored to their specific circumstances.