October 6, 2023 by Clare Curtis

FCA Review of treatment of Politically Exposed Persons (PEPs)

The Financial Conduct Authority (FCA) have instigated a review into the treatment of PEPs based in the UK by financial services firms. Although the FCA themselves do not have the power to change laws regarding this matter, they can still lay down expectations of firms; behaviour and will take swift action if any significant deficiencies are identified.

Issues they are addressing in the review include how firms are:

  • Applying the definition of PEPs to individuals.
  • Applying Enhanced Due Diligence (EDD) and ongoing monitoring commensurately and in line with risk.
  • Administering proportionate risk assessments of UK PEPs, their kinship and known associates of note.
  • Effectively communicating with their PEP clients.
  • Deciding to disapprove or close accounts for PEPs and family/associates.
  • Continuing to keep their PEP controls under review in order to be absolutely certain they remain appropriate.

The outcome of the review is expected to be reported at the end of June 2024.

Firms’ response to increased sanctions post Russia’s invasion of Ukraine.

To assist in firms’ being able to provide even greater compliance with the increased sanctions, the FCA have published important findings from assessments of systems and controls within financial services companies.

They uncovered areas of good practice, but this was also coupled with areas where there was indeed room for improvement. Obviously, the enormity of the unprecedented sanctions on Russia proved to present many problems regarding scale and complexity within the compliance area. The FCA’s weighty review of over 90 firms across several sectors identified both good and poor practices. In brief they included:

  • Governance and Oversight
    A number of firms were unable to demonstrate that they were providing senior management with satisfactory information regarding their exposure to sanctions or that they are extracting their knowledge and relying on global sanctions policies which are not in uniform with the UK sanction regime. Improvements here are expected.
  • Skills and Resources
    Several firms had a dearth of adequate resources to be certain of effective sanctions screening, resulting in backlogs in dealing with sanctions alerts, leaving themselves at a greater risk of non-compliance with sanctions commitments.
  • Screening Capabilities
    Some firms were found to be wanting in the calibration of their screening tools. Plus, several firms were also relying far too much on third party providers without possessing effective oversights over them.
  • Customer Due Diligence (CDD) and Know Your Customer (KYC) procedures.
    The FCA, quite incredibly, continue to locate instances of poor quality CDD and KYC assessments and backlogs, increasing the possibilities of the firm not identifying sanctioned persons or companies.
  • Breach reporting to the FCA
    The FCA expect proper and timely reporting of potential sanction breaches but alas discovered inconsistencies regarding this matter across several firms. After this, the FCA demand firms regard what had been reported, appraise their approach to reporting and, where applicable, take action to ensure everything is right and in order.

Proposed New Diversity & Inclusion Measures in Financial Services

The FCA and PRA have published a consultation paper regarding proposed changes to the regulations of Diversity and Inclusion within financial institutions. The proposals are aimed at non-financial conduct and aim to boost and improve D&I resulting in healthier work cultures. They also expect the proposals once in place to ‘Reduce corruption and unlock talent’.

Larger firms, those with 250 plus employees, will need to implement and maintain D&I strategies and report representation on certain traits. The new proposals are in brief:

  • The Conduct Rule
    This will now cover all serious instances of bullying, harassment and any other untoward behaviours and will not be restricted to regulated activities, as it currently stands.
  • Fit and Proper Assessments
    Currently the assessment enfolds ‘honesty, integrity and reputation’, while the proposed new regulation will include any other misconduct such as bullying, harassment, sexism et al reported about the individual.
  • Suitability guidance on Threshold Conditions.
    Aggregated across the entire firm, this assessment, much like the first two proposed changes, will include misconduct issues such as bullying etc.

It would appear, however, that the new regulations may find some competition from the Tories ‘Common Sense Group’, who claim the potential new regulations demonstrate ‘Overkill’. They say there are already several laws in place to help protect against such behavioural misdemeanours in the workplace including criminal law, employment law, and equalities law.

The consultation period is due to close on 18/12/23 with the final rules planned for 2024.

Introduction of a gateway for firms who approve financial promotions

The FCA have laid out their final policy position to their consultation regarding a gateway for firms who do, or wish to, approve financial promotions.  Among the changes, once they come into force, is the need for firms to apply to the regulator should they wish to continue to approve financial promos for non-authorised persons. They have also changed their assessment process for applicants at the gateway and the reasons as to whether or not they grant permission among a variety of other requirements and processes. If firms believe they need to apply for permission, applications will be accepted from 6/11/23 with the initial application period ending on 6/02/24. The following day the new legislation will be implemented.

FCA fine ADM Investor Services £6,470,600 for serious failings.

ADM have been hit with a whopping £6.4m+ fine by the regulator for inadequate anti-money laundering systems and controls.

ADM had high level of money laundering risk, which they did not satisfactorily have the necessary controls in place for. These risks included their business model, the geographical location of its clients, the proportion of business involving high-risk customers and because it had Politically Exposed Persons (PEPs) as clients. As we know, the FCA are seriously clamping down on poor AML practices, of which this a very good instance of.