UK FCA proposes to update its Financial Crime Guide on sanctions, transaction monitoring and more

The UK’s Financial Conduct Authority (the “FCA“) is currently consulting on proposed changes to its Financial Crime Guide (the “FC Guide“). As firms operating in the UK’s AML regulated sector will be aware, the FC Guide aims to enhance understanding of the FCA’s expectations and to help firms assess the adequacy of their financial crime systems and controls, and remedy any deficiencies. The FC Guide contains various self-evaluation questions, along with examples of good and poor practice drawn from FCA work and other financial crime publications.

The consultation (which closes on 27 June 2024) proposes various updates to the FC Guide in relation to sanctions, proliferation financing and transaction monitoring (“TM“), as set out in more detail below.

Sanctions

Over the last two years, the FCA has been conducting extensive assessment of firms’ sanctions systems and controls. The updates to the sanctions content in the FC Guide therefore propose to reflect the learnings from this unprecedented time, including summarising the FCA’s good and poor practice points published in September 2023.

The proposed updates regarding sanctions cover the following principal areas:

• reporting sanctions breaches / instances where a firm is directly or indirectly subject to financial sanctions;
• governance arrangements to oversee sanctions systems and controls;
• the importance of management information to help ensure that the operation of sanctions systems and controls is resourced and monitored effectively;
• further detail on the way in which firms can consider their exposure to potential sanctions regimes and how they can prepare to respond to future sanctions measures in a timely manner;
• further examples of good and poor practice in relation to the use of screening tools;
• guidance on the interplay between customer due diligence / know your customer procedures for AML purposes and managing sanctions risks; and
• guidance on the FCA’s expectations of how firms identify, assess and report potential sanctions breaches.

Proliferation financing

As readers will no doubt be aware, AML-regulated firms have been required to include proliferation financing in their risk assessments since 2022 (for further detail on the relevant developments, please see our previous blogpost). The FCA has proposed amendments to the FC Guide to reflect this requirement, including adding links to useful material for firms to consult when conducting or reviewing their proliferation financing risk assessments.

Transaction monitoring

The FCA is proposing to provide more guidance to help firms in adopting and maintaining automated TM systems (although the consultation notes that the FCA intends to maintain its existing position that automated monitoring is only required where appropriate for the size and nature of the business, and is not necessary if manual processes achieve an effective outcome).

The proposed updates regarding TM cover the following principal areas:

• new self-assessment questions and examples of good and poor practice clarifying the FCA’s expectations for firms to ensure that triggers in automated TM systems are set in a way appropriate for the risks the firm faces;
• good practice guidance around: (i) the process of switching from one automated TM system to another; and (ii) firms’ use of information from TM alerts to inform the risk assessment of individual customers / as part of their continuous monitoring of the efficacy of their overall control framework;
• good and poor practice guidance on evaluating the effectiveness of the firm’s monitoring system and understanding how it is set up; and
• guidance on the importance of oversight, resource and expertise.

Other amendments to the FC Guide

The consultation also proposes to include further provisions on crypto assets, including setting an expectation that crypto asset firms registered with the FCA as AML supervisor should take the FC Guide into account when designing their financial crime systems and controls to comply with their AML and sanctions obligations.

The proposals also include the introduction of a reminder that, where relevant, firms should consider the Consumer Duty alongside their financial crime obligations.

Although it remains to be seen whether the proposed amendments will be introduced into the FC Guide in precisely the same form as proposed by the FCA (which will, presumably, depend in part on responses to the consultation), a number of the above areas are ones where there has historically been limited guidance for firms to draw upon, such that additional clarity may be beneficial. Firms should carefully consider any updates to the FC Guide post-consultation, and consider whether their systems and controls require any enhancement.