These standards, PEPs, have been adopted and prescribed in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the "MLRs").
The UK Parliament asked that the FCA review how effectively firms are following the FCA Guidance on the treatment of PEPs for AML purposes and, in light of the findings, to consider whether it remains appropriate. The FCA reviewed this in detail under Section 78 of The Financial Services and Markets Act 2023. This was following concerns that had previously been raised with regard to FCA Regulated firms not effectively applying the regulatory standards and guidance applicable to PEPs and Relatives & Close Associates (of PEPs, known as "RCAs"). The review focused on how effectively firms are following the FCAs Guidance on the treatment of PEPs from an Anti-Money Laundering perspective.
The review saw the FCA contact over 1,000 PEPs, of which they received 65 individual responses, these were all considered when planning and selecting firms to review. The FCA undertook a data-gathering exercise with a number of firms from 5 retail sectors in the UK, which was then narrowed down to 15 firms for a more detailed review.
Key findings
Whilst the FCA found that most firms Systems & Controls were designed in a manner which implemented the FCAs
Guidance, it was noted that there was still room for improvement. The issues that were found by the FCAs review, includes the following:
- Definition
- The definition of PEPs and RCAs that were not in line with the MLRs and FCA Guidance.
- PEP Status
- 5 of 15 firms reviewed did not have suitable policies and procedures in place to review the PEP/ RCA status after the individual left public office.
- 2 of the 5 firms that had inadequate policies and procedures were unable to demonstrate that had considered declassifying a PEPs status in a timely manner.
- Customer Risk Assessment
- A small number of firms did not effectively consider the customers actual risk in their assessment and rating.
- Products and Services
- The FCA identified that there were instances whereby PEPs or RCAs were denied products or services, yet firms explained this was due to financial crime reasons.
- Account closure
- In the file reviews the FCA conducted did not highlight any instances where accounts were closed due to the individuals PEP status.
- Communication
- 6 of the 15 firms reviewed needed to improve the clarity and quality of their customer communication, so that it was clear for the customer to understand what they were being asked and why.
- Training
- 10 of the 15 firms' training on PEPs was weak and it was highlighted that it could be improved by using practical examples, case studies and the use of good and bad examples of practices.
- UK Requirements
- Some firms that had adopted global policies and procedures were not tailored to reflect UK Regulatory Requirements and Guidance on PEPs.
Some actions Firms should take
- Review the firm's current PEP / RCA arrangements in place (policies, procedures and controls).
- Ensure the Policies and Procedures adopt a UK Standard of Regulatory Requirements and Guidance.
- Treatment of PEPs / RCAs – where there is no other enhanced risk factors present, then the firm should consider a lower level of risk.
- Make sure that communication with customers is clear and effective when requesting information, so that the PEPs / RCAs can understand what information is being sought and why the requests are being made.
- Firms will, where relevant, need to comply with the Consumer Duty requirements to ensure their communications meet customers’ information needs, are likely to be understood by customers and enable them to make decisions that are effective, timely and properly informed.
- Make sure that staff are appropriately trained.
The FCA has also encouraged firms to read and respond to the FCAs consultation to provide feedback on whether the changes we propose to the FCAs Guidance are appropriate.
Our Regulatory Consulting Team have deep experience of supporting a range of firms in all of the above areas, across a range of sectors. Not only do we support with regulatory change, control analysis and preparation for upcoming supervisory initiatives, but alongside this business as usual support activity, we also perform more contentious work, such as Skilled Person reviews. We are on the Association of Professional Compliance Consultants (APCC) Alternate Skilled Person Panel and we have acted as a Skilled Person a number of times.
Our team consists of former regulators, experienced consultants and former practitioners - MLROs and Heads of Compliance / Risk who have been responsible for the implementation of Financial Crime Frameworks.
Please get in touch for a no obligation, confidential discussion about how we may be able to assist with your Financial Crime Compliance.
