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Following recent consultation and analysis, the FCA has issued a call to action to firms to improve their management and treatment of UK domestic politically exposed persons (PEPs) and relatives and close associates (RCAs) of PEPs.
The FCA’s review of PEPs, driven by complaints under the Consumer Duty, aimed to ensure that firms are:
- Effectively identifying and managing the risks associated with PEPs.
- Adhering to regulatory requirements for PEPs, applying EDD measures where higher risks are posed.
- Identifying gaps in their current practices to improve their compliance with PEP regulations.
- Not penalising domestic PEPs solely based on their status.
Whilst the FCA has launched a consultation on its proposed changes to its PEP guidance, which includes amendments to regulation 35 of the Money Laundering Regulations, firms should use this opportunity to re-review their AML framework and make improvements now.
Key actions for firms
The FCA review recommended key actions for all firms to strengthen the management of PEP risks:
Definitions and Scope:
- Confirm that the definitions of PEPs and RCAs used in the firm’s policies, and procedures align with regulatory standards. This might include defining domestic PEPs/RCAs separately from international PEPs/RCAs.
- Ensure that the definitions in use are not broader than the FCA’s expectations, for example that non-executive board members of civil service departments should not be treated as PEPs.
Documentation:
- Firms need to check that their policies and procedures suitably revisit and reassess PEP classifications after the individual had left public office.
- The firm’s procedures should include clear guidance on identifying and managing PEPs/RCAs, specifically the exact requirements for domestic PEPs/RCAs versus international PEPs/RCAs.- Any procedures should clearly provide an alternative approach to the sign off of PEP/RCA relationships within the firm, rather than solely relying on the MLRO or any deputy.
Risk Assessment Procedures:
- Firms need to revisit how they risk assess PEPs/RCAs to ensure it is a true reflection of the actual risks associated with the customer, providing examples of clear rationales as good practice. This may include creating a risk assessment addendum solely for PEPs/RCAs, given the FCA’s expectation is that domestic PEPs should be treated as lower risk.
Training and Awareness:
- More detailed training should be provided to the firm’s staff on the correct identification and handling of PEPs and RCAs: this should include relevant case studies and examples of good and poor practices. Firms need to ensure that staff understand the regulatory requirements and FCA expectations, as well as their own specific processes in relation to PEPs/RCAs.
Future Regulatory Updates:
- Through more effective horizon scanning, firms and their staff must stay informed about changes in regulations related to PEPs and RCA’s.
Communication
- When communicating with PEPs and RCAs, especially when requesting additional information, the firm’s staff should provide clear explanations for the information being requested to ensure compliance with the Consumer Duty requirements.
How we can help
Our team of financial crime specialists have extensive experience working alongside the regulator in helping our clients to review and remediate their financial crime frameworks. We also ensure that any financial crime measures deployed are commensurate with firms’ requirements under the Consumer Duty.
We’ve supported clients on sector-specific risk assessments, including the risk assessment of PEPs and RCAs, through sophisticated, multi-faceted tools, helping to determine the exact level of due diligence that should be undertaken on a case-by-case basis.
We’ve also supported firms in testing the performance of their third party electronic due diligence and screening platforms, to ensure the correct function of the controls and thereby provide firms with an accurate understanding of the level of residual risk that may be present.
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