By Feeras Juenda, Compliance Consulting Analyst
The Financial Conduct Authority (FCA) has published the findings of the review into the treatment of Politically Exposed Persons (PEPs), following claims of unfair treatment of PEPs, their relatives and close associates (RCAs) by UK Firms. Here, we break down the results of the FCA’s review and the key proposals put forward.
What prompted the FCA’s review?
As defined in the Money Laundering Regulations, PEPs are individuals ‘entrusted with prominent public functions’. They’re currently subject to enhanced customer due diligence (EDD) measures due to their public positions and the consequent heighted risk of bribery and corruption. However, scrutiny should not presume that PEPs engage in illegal activity, but that there is heightened risk that firms must account for when completing their due diligence.
The following statement in the FCA’s press release by its Executive Director of Markets and International, Sarah Pritchard, highlights the sensitivity of this area of continued focus:
“Public service naturally comes with greater scrutiny. But it must be proportionate and shouldn’t disadvantage people running for office or taking senior public roles, or their families. That requires a balancing act.”
Despite the intention for the rules to be proportionate, according to some domestic PEPs (those who are PEPs by virtue of a UK political position), firms had, in recent years, applied these regulatory requirements – and the FCA’s guidance – disproportionately against them and their RCAs. Further, interest in the subject of de-banking has increased significantly in recent months following high profile incidents. As such, the FCA was required by the government to assess firms’ adherence to its guidance on the treatment of PEPs for anti-money laundering (AML) purposes, FG17/6, which was introduced in July 2017, and amend it if necessary.
The FCA’s findings
Generally, the FCA notes that, although the majority of firms reviewed did not impose disproportionate or excessive EDD measures against PEPs, and none would deny them products or services based solely on their status, there are areas for improvement. The key areas for concern identified by the UK financial services regulator are listed below:
- Some firms were using definitions of PEP and RCA that were either unclear or went beyond legal and regulatory requirements
- In the event that a PEP customer leaves their public position, firms are required to declassify them, along with any RCAs, in a timely manner
- The majority of firms reviewed offered unsatisfactory staff training on PEPs, and could improve this with the use of practical examples or case studies
- Some firms failed to consider customers’ “actual risk in their risk assessment and rating” and provide “a clear rationale for their risk rating”
- The FCA has emphasised the necessity for clear and detailed communication with PEP and RCA customers to ensure that they better “understand what they’re being asked to do or provide, and why”
Guidance consultation
On 18 July 2024, the FCA launched a Guidance Consultation, GC24/4, which proposes to amend its FG17/6 Guidance and closes for comments on 18 October 2024. The key amendments to the 2017 PEP guidance in light of the FCA’s review are as follows and seek to ensure that it:
- Clarifies that domestic PEPs should be treated as lower risk than foreign PEPs, in accordance with recent changes to the FSMA 2023
- Clarifies that non-executive board members of civil service departments should not be treated as PEPs
- Provides greater flexibility in relation to the approval of PEP relationships by firms’ compliance functions
It’s worth noting, however, that measures firms are required to take when determining the source of wealth and source of funds of PEPs and their RCAs, in lower risk cases, remain vague. The FG17/6 Guidance merely states that firms are required to ‘take less intrusive and less exhaustive steps’ and ‘minimise the amount of information they collect and how they verify the information provided’ as well as primarily using information publicly available to verify source of wealth and source of funds. In contrast, the Joint Money Laundering Steering Group provides further guidance regarding source of wealth checks for higher risk PEPs. Overall, this is an area firms should watch going forward.
What needs to be done
Firms should consider the FCA observations as well as the proposed guidance changes and consider whether they should amend their procedures around the onboarding of PEPs.
How IQ-EQ can help
Our expert financial crime team assist firms of various sizes and types with the financial crime requirements. Including systems & controls reviews as well as compliance infrastructure updates.
To discuss the FCA’s new expectations regarding treatment of PEPs or find out more about the support available from IQ-EQ’s expert regulatory compliance services team, contact us today.
About the author
Feeras is a Compliance Consulting Analyst for IQ-EQ, based in London. Feeras completed a Regulatory Compliance internship at IQ-EQ, and holds a degree in law from City, University of London.
