By Adil Shahzad, Compliance Monitoring Analyst
The Financial Conduct Authority (FCA) has published a consultation paper (CP24/9), proposing updates to its Financial Crime Guide (FCG). The consultation was initiated following the UK government’s Economic Crime Plan 2 (2023 – 2026).
The FCG is an essential resource for firms in the UK financial sector, offering guidance on how to combat financial crime and comply with relevant regulations. The guide covers areas such as anti-money laundering, terrorist financing, bribery and fraud. Given how volatile the financial crime landscape is, the FCA has deemed it necessary to update the FCG to ensure firms remain equipped to tackle emerging risks.
The proposed updates to the FCG include several key proposals which firms are set to be impacted by. The FCG doesn’t introduce new rules or requirements, but rather offers guidance, self-evaluation questions, and examples of good and poor practices.
1. Sanctions
Following Russia’s invasion of Ukraine in 2022, sanctions have been in the spotlight for the FCA and other regulators in the UK and globally. The FCA update to sanctions guidance are derived from the FCA observations of the ‘good’ and ‘bad’ practices witnessed during the past two years. Sanctions are becoming increasingly common globally, and the FCA is urging firms to adopt more robust frameworks for managing sanctions risk. For example, senior management should take greater responsibility for managing sanctions risk, the same way they are expected to do for other risks faced by the business. In addition, the FCA is expecting additional reporting requirements for firms such as reporting sanction breaches (both where clients are sanctioned directly or indirectly, e.g. where the beneficial owners of a client entity are sanctioned). The FCA also provides new guidance on how firms identify, assess and report potential sanctions breaches.
2. Transaction monitoring
Another proposed change is the enhancement of transaction monitoring practices. The FCA recognises that transaction monitoring is critical in detecting and preventing financial crime. The consultation paper suggests that firms should leverage innovation such as artificial intelligence to improve the accuracy and efficiency of their transaction monitoring systems. The utilisation of AI can provide a more rounded view of customer behaviour and effectively detect suspicious activity. From previous publications, fines and speeches, the FCA has been critical of transaction monitoring systems being poorly deployed in the industry. This proposal in the FCG should encourage firms to adopt and maintain these monitoring systems whilst ensuring they work effectively. Firms would need to ensure their systems are calibrated correctly. The paper does state automated monitoring is only required where appropriate for the size and nature of the business, and it is not necessary if a firms manual processes achieve an effective outcome.
3. Proliferation finance
A noteworthy addition to the FCG is the inclusion of guidance on proliferation finance (PF). This refers to the financial support of the proliferation of weapons of mass destruction and their delivery systems. Currently under the Money Laundering Regulation (MLR) firms have been required to include PF in their risk assessments since 2022. The proposed changes in the FCG will explicitly reference PF throughout the guide and will also include adding links to useful material for firms to refer to when completing or reviewing their PF risk assessments. This emphasis on PF considerations throughout the guide is to highlight the importance of conducting a PF risk assessment.
4. Cryptoassets
The FCA currently supervises cryptoasset businesses only for anti-money laundering and counter-terrorist financing under the Money Laundering Regulation (MLR) 2017. Under the proposed changes of the FCG, crypto firms registered under the MLR should refer to and apply the FCG when designing their financial crime systems and controls. This will help firms comply with their regulatory obligations under the MLR and will help prepare firms for the UK’s future regulatory regime for cryptoassets. Cryptoasset firms must follow the ‘Travel Rule’, which came into force on 1 September 2023. It requires cryptoasset businesses in the UK to collect, verify and share information about cryptoasset transfers. Under the consultation the FCA is proposing to provide links to useful guidance material for cryptoasset firms to comply with the ‘Travel Rule’.
5. Consumer Duty
Consumer Duty came into force on 31 July 2023 for open products and services, and on 31 July 2024 for closed products and services. Under Consumer Duty, firms are expected to deliver good outcomes for retail consumers. Under the FCG proposal, the FCA is proposing that Consumer Duty must be considered along with financial crime obligations. This means firms should have a good financial crime system and controls in place, which can protect consumers and their money. Firms should apply a consumer duty lens to decisions on managing financial crime risk.
6. Consequential changes
The last area of change is a series of general updates to ensure that the FCG stays up to date with changes in the regulatory landscape. The consultation paper states that the FCA want the FCG to have recent case studies on financial crime. Since the UK’s exit from the EU, the FCA want to remove references to EU rules and supervisory authorities to ensure that regulatory references are now consistent with UK regulations.
Next steps
Consultation for this paper closed on 27 June 2024. During the time it was open, firms were encouraged to give feedback on the proposals. The FCA is currently reviewing the feedback and will finalise updates to the guide in due course. In the meantime, firms are expected to assess how the proposed updates affect their financial crime systems and controls and determine if any additional improvements are necessary.
How IQ-EQ can help
We have an experienced financial crime team who have assisted firms of various sizes with AML reviews, projects and remediation exercises across various regulatory activities and asset classes.
To discuss the FCA’s expectations under the updated FCG or find out more about the support available from IQ-EQ’s expert compliance consulting team, contact us today.
About the author
Adil is a Compliance Monitoring Analyst as IQ-EQ, based in London. Adil completed a Regulatory Compliance internship at IQ-EQ, and graduated from Royal Holloway, University of London with a degree in Law.
