FCA publishes review on the treatment of politically exposed persons, along with proposed amendments to guidance

The UK's Financial Conduct Authority (the "FCA") has published the findings from its review of firms' treatment of politically exposed persons ("PEPs") (the "Review"), along with proposed amendments to its guidance on PEPs (the current guidance ("FG17/6") can be accessed here).

This briefing highlights the key takeaways for firms from the FCA's review, and summarises the FCA's proposals in relation to amending its guidance; further background on these developments can be found in our previous post.

The Review

In carrying out the Review, the FCA contacted over 1,000 PEPs and received 65 individual responses. It then undertook data-gathering and analysis with an initial group of firms from five retail sectors, and narrowed this down to 15 firms for a more detailed review. Although not intended to be a representative sample, the FCA has stated that those 15 firms hold approximately 60% of the UK market share for retail main current accounts.

The key takeaway from the Review (as summarised in the FCA's press release) is that firms should "do more to ensure parliamentarians, senior public servants and their families are not treated unfairly". Although the Review found that most firms did not subject PEPs to excessive or disproportionate checks, and none would deny them an account based on their PEP status, all firms could improve their treatment of PEPs.

The main issues identified by the FCA are set out below.

• Some firms included definitions for PEPs (and their relatives and close associates) which were wider than required by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the "MLRs") and FG17/6.
• Some firms did not have effective arrangements in place to carry out reviews and ensure that a PEP classification remained appropriate once the relevant individual had left public office.
• A small number of firms had a risk assessment methodology which did not properly take account of all relevant risk factors and individual circumstances. The Review emphasises the importance of providing a clear rationale or narrative to explain a customer's risk rating.
• Although some PEPs had reported excessive requests for information, the FCA identified only a small number of disproportionate information requests in the Review.
• All firms that were part of the Review confirmed that they would not decline products or services to UK PEPs (or their relatives and close associates) simply because of their PEP status. The Review identified that, in relation to sampled PEPs who were denied services or had existing accounts closed, this was due to financial crime reasons, and not the relevant individual’s PEP status.
• The Review identified that firms need to improve the clarity and detail of their communications with PEP customers so that customers could understand what they were being asked to do and why.
• Firms need to improve training; the Review recommends using practical examples and case studies as well as examples of good and poor practices to improve staff understanding and achieve consistency in customer treatment.
• The majority of the firms within the Review had made changes and improvements following recent amendments to the MLRs in relation to domestic PEPs (described in our previous blogpost). However, some needed to update their policies to reflect these developments.

In addition to containing further detail on the specific issues set out above, the Review contains a number of examples of good practice identified by the FCA. Firms may also want to consider these examples against their own policies and procedures.

The FCA has provided detailed feedback to the 15 firms that were part of the Review, in order to resolve the identified issues. In a small number of cases, the firm will be required to appoint an independent skilled person for a more detailed review.

The FCA has announced that it expects all firms to check that their policies, procedures and controls are in line with its guidance (which is subject to certain minor proposed amendments following the Review). Firms should also address the FCA's concerns about communication and training, in particular.

Consultation on changes to guidance

As noted above, following the Review, the FCA is consulting on proposed amendments to FG17/6. The FCA has concluded that the guidance remains appropriate and has not identified significant changes; however, it has identified some areas where FG17/6 could be clarified to facilitate effective compliance by firms.

The proposed changes fall within four categories:

• Non-executive board members of civil service departments: the FCA proposes to clarify that these roles should not, in the UK context, be treated as PEPs.
• Sign-off for PEP relationships: following industry feedback containing concerns about the independence of money laundering reporting officers ("MLROs") in the context of the expectation that the MLRO will sign off on PEP relationships, the FCA proposes to amend FG17/6 to allow for alternative approaches, provided the MLRO continues to have oversight of all PEP relationships within the firm.
• Reflecting changes to MLRs: the FCA propose to make targeted amendments to reflect the fact that the MLRs provide that the starting point of any risk assessment of a domestic PEP is that they pose a lower risk than a foreign PEP.
• Minor additional changes: the FCA is proposing to make a small number of "minor and mostly non-substantive" changes to FG17/6 including removing outdated references to EU guidance.

The consultation documentation states that the FCA would also welcome any comments on where FG17/6, as a whole (within the confines of the MLRs), might help firms apply a more effective risk-based approach to UK and foreign PEPs.

Firms wishing to respond to the consultation can do so via an online response form (available here). The consultation will close on 18 October 2024.