Regulator finds that firms could improve how they conduct anti-money laundering checks when dealing with UK PEPs.

On 18 July 2024, the FCA published feedback from its multi-firm review on the treatment of politically exposed persons (PEPs), along with a Guidance Consultation (GC24/4) proposing targeted amendments to its guidance on the treatment of PEPs.

Following concerns from UK PEPs in recent years that financial services firms have been applying the FCA’s guidance on PEPs disproportionately to them, their relatives, and their close associates, two provisions were included in the Financial Services and Markets Act 2023 to address this issue. The first provision required HM Treasury to amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 to clarify that a UK PEP should be treated as presenting a lower level of risk than a non-UK PEP. The necessary legislative changes came into effect on 10 January 2024. The result is that, if no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to a UK PEP is less than that to be applied in the case of a non-UK PEP, cementing the view the FCA takes in its guidance.

The second provision required the FCA to review its guidance on PEPs, publish the results of its review, and, if appropriate, publish draft revised guidance for consultation. The FCA had been required to fulfil its obligations under this provision by the end of June 2024. However, publication was delayed due to the UK election.

FCA Review of the Treatment of PEPs

The FCA’s review, which was launched in September 2023, gathered input from UK PEPs and regulated firms. The FCA reviewed data from 36 firms across the retail banking, consumer credit lending, e-money/payments, and wealth management sectors. It also selected 15 firms for a more detailed review of policies and procedures, as those firms hold approximately 60% of the UK market share for retail main current accounts, and include large firms in the retail banking and consumer credit lending sectors. It looked into how firms were applying the FCA’s guidance on the treatment of PEPs, in particular how they were applying relevant definitions and whether they were taking a risk-based and proportionate approach.

The FCA concluded that all firms could improve their dealings with UK PEPs. However, the FCA found that, despite the shortfalls it identified, most firms in its review did not subject PEPs to excessive or disproportionate checks, and none would deny PEPs an account based purely on their PEP status.

The key issues identified by the FCA include the following:

• Firms using a definition of PEP, relative, or close associate that goes beyond legal requirements. Nearly half of the firms in the detailed review used a wider definition than the FCA would have expected. Further, some firms used unclear definitions or expanded definitions that were not clearly risk-based.
• Firms not reviewing the status of PEPs promptly after they have left office. The FCA found that several firms had policies under which the firm would only consider declassifying a PEP after several years, far longer than the 12-month minimum suggested in the FCA’s guidance. The FCA also emphasises that this 12-month period does not apply to relatives or close associates, whom firms should consider declassifying immediately. The FCA highlights the importance of considering declassifying customers in a timely manner, and suggests a more risk-based approach, such as evaluating someone’s ongoing political connections and the likelihood of a return to office.
• Firms not considering the customer’s actual risk in their assessment and rating, and not giving a clear rationale for their risk rating. The FCA expects firms to conduct a holistic risk assessment, considering a range of factors, and to revisit this assessment when a PEP’s circumstances change. While the FCA notes that generally firms did not impose overly burdensome due diligence measures in practice, it warns that many of the firms reviewed did not have policies and procedures that set out how to take an effective and risk-based approach.

• Firms not communicating with PEPs effectively and in line with the Consumer Duty. In particular, the FCA expects firms to provide enough detail so that customers can understand what they are being asked to do or provide, and why. The FCA also suggests that firms should provide explanations for any application rejections or account terminations, and provide customers with relevant contact details so that they can follow up.
• Firms not having a fully effective approach to senior management governance and oversight. The FCA expects to see a proportionate level of sign-off, based on a PEP’s risk rating, and evidence of escalation to relevant committees for higher-risk PEPs. The FCA also found that not all senior managers in its review were receiving appropriate and meaningful management information.
• Firms not having adequate staff training in place. 10 of the 15 firms in the detailed review had weaknesses in their staff training. The FCA considers training could be improved by using practical examples and case studies. It also observed that some firms displayed inconsistencies between training and staff guidance.
• Firms operating under global policies and procedures which are not appropriately tailored to reflect the UK requirements. The FCA clearly expects firms to have UK-specific measures for some areas to ensure that, for example, expansive definitions or overly risk-averse approaches are not employed. The FCA suggests, for example, that groups could consider including a UK addendum to global policies to ensure that UK-specific requirements are followed.
• Firms not having updated their policies and procedures to reflect the legislative changes that took effect in January 2024.

The FCA notes that it expects all firms to draw relevant lessons from the review’s findings. In particular, firms are expected to address the following action points:

• Check that their policies, procedures, and controls are in line with FCA guidance and reflect the latest legislative position.
• Address any gaps in current arrangements.
• Ensure communications with customers are clear and effective, and consider the Consumer Duty overlay.
• Ensure that staff members are trained appropriately on how to deal with UK PEPs, so that customers receive consistent outcomes.

The FCA also states that it has provided thorough feedback to the 15 firms involved in the review, and indicates that it is appointing skilled persons to conduct more detailed reviews of a small number of firms.

Proposed Changes to FCA Guidance

As well as indicating how firms could improve their application of the guidance in its review findings, the FCA is proposing some targeted changes to the guidance to:

• reflect the changes to legislation which clarified that, as a starting point, UK PEPs should be considered to be lower risk than non-UK PEPs;
• clarify that non-executive board members of civil service departments should not be treated as PEPs; and
• allow greater flexibility in who can approve or sign off on PEP relationships, by no longer suggesting that the Money Laundering Reporting Officer should sign off on all PEP relationships, provided they continue to have oversight of all PEP relationships.

The consultation runs until 18 October 2024. The FCA highlights that it welcomes comments on the proposed changes, as well as any comments on how the guidance as a whole might help firms apply a more effective and risk-based approach.

Impact for Firms

The feedback clearly shows that, while the FCA does not consider firms are getting this area completely wrong, it does expect to see some improvements. A key theme in the feedback is that the regulator wants to see firms taking a more risk-based and bespoke approach, which considers individual circumstances. While firms will need to have a clearly documented approach, the FCA does not want to see overly conservative blanket policies being applied with no analysis or evaluation of the actual risk. The FCA also wants to see firms clearly documenting their rationale behind decisions. Of course, this approach leaves more room for discretion and therefore more margin for error.

The treatment of PEPs is a notoriously sensitive and difficult area, which requires a fine balance. Anti-money laundering systems and controls have been an important focus for the FCA in recent years, with failings being the cause of many enforcement actions. However, this is one area where going beyond the regulatory requirements is seen as detrimental to customers, and the regulator expects firms to take a proportionate approach.

All firms who deal with PEPs will need to review their policies and procedures and benchmark these against the FCA’s findings. The FCA also highlights in its feedback that firms had not reviewed these policies as part of their Consumer Duty implementation work, so when conducting a review firms should also be mindful of the Consumer Duty angle. The FCA emphasises that firms should conduct any reviews now, rather than waiting for the changes to the guidance to be finalised.

It is also interesting that the FCA pinpoints global policies as potentially problematic. Global groups will often try to apply the highest common denominator in group policies, to avoid having to take different approaches across jurisdictions. However, when dealing with PEPs, such an approach will not meet regulatory expectations, and so firms will need to ensure that any group policies allow sufficient provision for the UK position.

The FCA states that it will continue to monitor how firms approach PEPs through its ongoing supervisory engagement, and that it will act if needed. Consequently, this will likely remain an area of supervisory focus for the regulator in the future. Firms should be able to evidence how they have reviewed their policies and procedures, and what changes they have made in light of the FCA’s feedback.