FCA Urges Financial Firms to Improve Treatment of Politically Exposed Persons

23 Jul

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Introduction

On July 18th, after completing a multi-firm review, the Financial Conduct Authority (FCA) released its assessment of how well firms are following its current guidance on the treatment of Politically Exposed Persons (PEPs) and their Relatives and Close Associates (RCAs) for anti-money laundering purposes.

This review has been conducted amid growing concern amongst UK politicians that firms are applying controls on PEPs and RCAs in a disproportionate way, including excessive requests for due diligence and account rejections/closure with little or no explanation. These concerns have been well documented in the UK media following the closure of Nigel Farage’s bank account with Coutts, which we previously wrote about here and here, which occurred one-year prior to the publication of this post.

The following post provides a summary of the multi-firm review performed by the FCA.

The FCAs Approach

Preliminary PEP Input

The FCA contacted UK 1,000 PEPs, obtaining 65 responses. These responses helped to shape the methodology of the study as well as the firms to be included within it.

Phase 1 - Detalied Data Collection

Data was collected on 36 firms to identify which should be reviewed in more detail. These firms represent over 73% of the UK market share for retail main current accounts and included 12 of the most referenced firms in the 65 responses received from PEPs.

Phase 2 - Assesment of Policies and Procedures

The scope was narrowed to 15 firms with the intention of capturing firms which the FCA expected to perform both well and poorly. These firms represent 60% of the UK market share for retail main current accounts.

Phase 3 - Customer File Review

5 firms were selected from the 15 in Phase 2 to perform detailed reviews of 40 customer files. This included 30 files for UK PEPs/RCAs and 10 files for overseas PEPs, allowing for comparison of the approach for UK PEPs and foreign n PEPs at each firm. Interviews were held with 3 other firms from the 15.

Key Findings

The FCA concluded that there was room for improvement for all firms in relation to their handling of UK PEPs. However, contrary to concerns raised prior to the review, in most instances firms were not found to apply excessive or disproportionate checks. Additionally, none of the firms would deny providing a product or service to a PEP due to their PEP status alone.

Some firms included definitions for PEPs and RCAs that go beyond the legal requirements and FCA guidance. Over half of the firms reviewed utilised a definition of PEPs and/or RCAs that was broader than the FCA’s expectations and there were instances of firms using unclear definitions that were not risk-based.
Some firms lack effective policies and procedures to review PEPs and RCAs classification in a reasonable timeframe after the PEP has left public office. It was noted that at several firms declassification would only be considered after several years. The FCA highlights the importance of considering declassifying customers in a timely manner and utilising a risk-based approach during this process which considers: (i) ongoing links/ interests to businesses, (ii) adverse information, (iii) ongoing political connections, (iv) likelihood of a return to office soon.
A small number of firms did not effectively consider the customer’s actual risk in their assessment and rating. In such cases, assessments failed to include a clear rationale or narrative explaining the customer’s risk rating.
The findings showed that firms are not applying enhanced due diligence (EDD) disproportionately and despite complaints from PEPs and RCAs that they had received requests for excessive information, this was not corroborated by the data and was limited to a small number of instances.
There were no cases of PEPs or their RCAs having applications for products or services rejected, and / or existing accounts being closed purely due to their status. In instances where products or services were rejected and/or accounts were closed, this was found to be due to an alternative reason, such as not providing the necessary information requested.
Firms need to improve the clarity and detail of communications with PEP and RCA customers so that customers can understand what they were being asked to do and why. In some cases, the justification for the request for additional information was too generic, such as simply referring to the firm needing to satisfy its regulatory obligations.

What’s Next?

The FCA have provided detailed individual feedback on the firms included within the study so that they can implement the necessary remediations. For all other regulated firms, the FCA expects that they will review the findings and address any issues as required.

Key areas highlighted include:

Review and update policies, procedures and controls relating to the treatment of PEPs and their RCAs and to ensure that they reflect the current legislative position. This includes the requirement to classify UK PEPs and RCAs as lower risk in the absence of enhanced risk factors. If not already provided, staff should be provided with practical guidance on the risk-based and proportionate application of controls for PEPs and RCAs so that customers receive consistent outcomes.

Improve communication approach to ensure that messaging to PEPs and RCAs is clear and effective and also comply with the Consumer Duty principles. PEPs and RCAs should understand what information is being sought and why the requests are being made, allowing them to make effective, timely and properly informed decisions. Firms should provide clear explanations for any application rejections or account terminations, including relevant contact details so that customers can follow up if needed.

Improve Staff Training in relation to the handling of PEPs and RCAs. This should be tailored to the role of the employee and provide a range of practical examples and case studies, as well as examples of good and poor practices.

FCA Consultation – in addition to advising how firms can improve their application of the guidance, the FCA has also launched a consultation on its proposed amendments to its guidance on the treatment of PEPs:

Clarifying that non-executive board members of civil service department should not be classified as PEPs because of their role.
Updating guidance to reflect the latest legislation which states that firms should treat UK PEPs as lower risk than non-UK PEPs, unless there are other risk factors that are unrelated to their PEP status.
Providing greater flexibility on who can sign-off on a PEP relationship, removing the need for the Money Laundering Reporting Officer (MLRO) to sign-off on all PEP relationships, provided they have continued oversight of all PEP relationships within the firm.

The consultation closes on 18 October 2024 and has requested impacted firms and individuals to provide comments.

How Can NLC Help?

NLC has a specialist Anti-Financial Crime Practice including senior industry AML practitioners and former FCA ‘Skilled Persons’ who can review your PEP oversight, policies and procedures and training to ensure they meet the FCA’s expectations and industry best practice.

Please contact Peter Brooke (pbrooke@new-linkconsulting.com) if you would like to discuss how we can help.