As part of their compliance with the Financial Services and Markets Act 2023 (FSMA 2023), the Financial Conduct Authority (FCA) and other regulatory bodies designated by HM Treasury are required to review how firms are applying their guidance to ensure it remains appropriate or requires changes.
Earlier this month, following a period of reviewing its existing guidance, the FCA announced that it was launching a period of consultation for firms to submit feedback on proposed changes to its guidance around the treatment of politically exposed persons (PEPs).
Why are the FCA consulting?
The FSMA 2023 introduced a number of important updates to the UK’s regulatory framework for financial services, and, as part of these updates, the FCA is required to keep its guidance under review to ensure it remains appropriate or requires changes.
While the FCA prides itself on its guidance ‘generally remaining appropriate’, it has this month launched a consultation period around its guidance on how regulated firms should treat and manage customers that are designated as PEPs.
🔗 Working with Politically Exposed Persons (PEPs)
What are the proposed changes to PEP guidance?
Identifying ‘room for improvement’ in the way PEPs are managed and treated by regulated firms, the FCA has outlined four proposed amendments to the current PEP guidance.
Non-executive board members (NEBMs) of civil service departments: In its proposal, the FCA is seeking to clarify guidance around the treatment of non-executive board members of civil service departments.
These roles, typically advisory without executive authority, were sometimes misclassified as PEPs by firms, leading to unnecessary enhanced due diligence.
It proposes that NEBMs of UK civil service departments should not be treated as PEPs.
Sign off for PEP relationships: Current guidance states that all PEP relationships should be signed off at a minimum by the Money Laundering Reporting Officer (MLRO), with higher-risk relationships potentially being signed off at a higher level.
Feedback sources from the industry found that this requirement raised concerns about the MLRO’s independence.
The proposed change will allow alternative approaches to the sign-off process, provided the MLRO retains oversight of all PEP relationships within the firm.
Reflecting changes to money laundering regulations: At present, guidance expects firms to treat ‘domestic PEPs as lower risk unless there are other risk factors apparent that are unrelated to their PEP status.’
Following an update to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) issued by the Government in January 2024, the FCA proposes that guidance be amended to reflect these changes.
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As a result, the FCA proposes that the starting point for a firm’s risk assessment is that domestic PEPs pose a lower-risk than foreign PEPs. Firms would be required to start with the assumption that domestic PEPs pose a lower risk. This does not mean they are risk-free, but the initial presumption is that they are less risky compared to foreign PEPs.
Minor additional changes: The guidance will also undergo minor and mostly non-substantive updates, such as removing outdated references to EU guidance that no longer applies in UK law.
Who does this apply to?
The guidance applies to firms that the FCA supervises under MLR 2017 however, this consultative period and subsequent call for feedback on the proposed changes may also be relevant to those working with firms subject to FCA supervision, trade associations within the financial services industry, customers who meet the definition of a PEP, and any other individuals or organisations with an interest in FCA supervision for anti-money laundering purposes.
What will happen next?
The period of consultation on these changes opened on 18th July 2024 and will close in three months’ time on Friday 18th October 2024.
During this time, the FCA will seek feedback from regulated firms, impacted parties, and affected individuals on the proposed changes during this time with plans to publish feedback along with the final amended guidance shortly after.
What could this mean for AML compliance teams?
Following this initial period of consultation, the FCA will likely issue changes to its guidance around how PEPs are treated by regulated firms. As a result, firms will need to prepare themselves to potentially update their anti-money laundering and counter terrorist financing policies and procedures to reflect any changes. This includes training staff to understand and apply the revised risk assessments for domestic versus foreign PEPs.
Here at NorthRow, we will be following the consultation period and tracking any amendments to guidance closely, be sure to check back in October for an update or follow us on LinkedIn to make sure you never miss a thing.
