On 18 July 2024, the FCA published the findings of its review into the treatment of Politically Exposed Persons ("PEPs") and Relatives and Close Associates of PEPs ("RCAs") by UK regulated firms. The review identifies some key findings and areas for improvement in the sample surveyed, and stipulates certain actions that all firms should now take to ensure best practice in this area.
Simultaneously, the FCA has also published a consultation paper on proposed updates to its guidance in respect of firms' treatment of PEPs and RCAs. Open for responses until 18 October 2024, the consultation seeks views on revisions to the guidance which, in general, appear intended to narrow the scope of the PEP category that firms are using in practice, alongside updates to clarify best practice for PEP relationship approval within firms and to bring the guidance into alignment with regulatory changes from earlier in the year.
The review, mandated by Parliament under Section 78 of the Financial Services and Markets Act 2023 ("FSMA 2023"), requires the FCA to review its guidance relating to PEPs with a view to assessing whether the guidance already in place is being adhered to by firms, as well as whether any updates to the guidance are required. The FCA sought views from over 1,000 PEPs directly, receiving 65 replies, and also conducted a review of the application of the existing guidance with firms from across 5 retail sectors, later narrowed to a detailed analysis in respect of 15 firms in particular.
The review has found that some firms are using a wider definition as to who will be considered a PEP or an RCA than the regulations require, with the resulting concern that the application of enhanced customer due diligence ("enhanced CDD") may have been excessively broad as a result, with corresponding potential consumer detriment. The FCA also found that some firms have no processes in place for reviewing, and potentially removing, a person's PEP status once they had left public office, and that a handful of firms among those reviewed also lacked a proper risk assessment process that would lead to consideration of the actual risk associated with each particular prospective customer.
However, the review found also that despite these deficiencies in policies and processes, in practice there was no systematic over-application of enhanced CDD, although there were isolated cases identified in which firms had over-requested information from customers and anecdotal evidence from some of the directly-surveyed PEPs that they had been asked for information that they personally considered excessive.
The firms surveyed in detail under the review were consistent in their position that a person's assessed status as a PEP or RCA would not, by itself, cause them to refuse service or to terminate a relationship with that person. Of the instances identified by the FCA where PEPs or RCAs were denied access to products or services, in all cases there were other factors besides that person's PEP or RCA status which also contributed to that decision, such as refusal by the individual to provide requested information.
The review found that a substantial minority of firms surveyed in detail needed to improve the clarity and quality of their communications to customers, with a view to making clearer to customers what they were being asked to provide or do, and why. A majority of surveyed firms also required improvements in staff training covering PEPs and RCAs, in order to ensure that any policies or procedures that had been put in place were then consistently implemented.
Finally, the review found that most, but not all, of the surveyed firms had made updates to their policies and procedures to account for the regulatory changes that took effect on 10 January 2024, under which the 'starting point' is that firms should consider UK PEPs and RCAs as presenting a lower risk than foreign PEPs and RCAs, absent evidence or other factors to the contrary.
Following on the heels of the review's findings, the FCA has set out four key actions that it expects firms to take in response. Firms should now:
Alongside publication of the review findings and actions required from firms, the FCA has adhered to the second limb of Section 78 of FSMA 2023 by publishing proposed updates to its guidance in respect of PEPs and RCAs. The consultation on its proposals is open for responses until 18 October 2024.
The updated guidance, if implemented as proposed, would include a clarification that non-executive members of the boards of civil service departments should not fall within the definition of PEPs. The FCA has received indications that some firms are treating such individuals as falling within the definition.
The proposed updates also address firms' internal sign-off of PEP relationships. The relevant regulations require that all PEP relationships are to be signed off by a firm's 'senior management', and also require that the FCA should provide in its guidance as to what will constitute 'senior management' in the financial sector. Currently, the minimum requirement is for sign-off by a firm's Money Laundering Reporting Officer ("MLRO"), with the guidance also indicating that prospective relationships assessed as being higher-risk should be signed off at a more senior level than this. In industry feedback, concerns have been raised that this hierarchy of responsibility might compromise the independence of the MLRO. The updated guidance seeks to address this by providing for alternative sign-off routes, although the MLRO's oversight role is to be maintained in all instances.
Besides these key changes, the proposed new guidance also contains updates to bring it in line with the January 2024 regulatory updates as well as some other minor changes. On top of this, the FCA has also indicated that it would welcome further comments from consultation respondents on how else the guidance might be amended to help firms to apply a more effective risk-based approach.
