FCA launches review of treatment of Politically Exposed Persons

The Financial Conduct Authority (FCA) has published a press statement in which it announces an upcoming review of the treatment of domestic Politically Exposed Persons (PEPs) by regulated firms in relation to anti-money laundering (AML). The review is being conducted due to concerns that firms may not be treating customers individually as directed by UK legislation and FCA guidance. The FCA has also published corresponding terms of reference in which it explains the background for the review and its key focus during the upcoming inspections.
##### Background
As PEPs are individuals who hold prominent public functions and may have the ability to abuse their position for private gain, potentially using the financial system to launder money, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (MLRs) (SI 2017/692) require firms to apply enhanced due diligence measures when dealing with PEPs, including assessing their source of wealth. This also applies to family members and close associates of PEPs.
The FCA published guidance in 2017 to help firms apply a proportionate and risk-based approach to domestic PEPs. The guidance states that domestic PEPs should be treated as lower risk as long as there are no other risk factors outside of their position as a PEP. Firms are expected to use information that is reasonably available to them, including public domain information, and take less intrusive steps to establish the source of wealth for lower risk PEPs.
The FCA has recently found that firms may not be effectively implementing this guidance. Some firms tend to be using standardized questionnaires that do not sufficiently recognize the lower risk expectations for UK domestic PEPs. This could result in individuals being excluded from products or services unfairly.
##### Key content and focus of the review
The upcoming review will assess how firms manage the risks from UK PEPs and their family members or close associates. The FCA will thereby focus on how firms are (as quoted)
– applying the definition of PEPs to individuals
– conducting proportionate risk assessments of UK PEPs, their family members and known close associates
– applying enhanced due diligence and ongoing monitoring proportionately and in line with risk
– deciding to reject or close accounts for PEPs, their family members and known close associates
– effectively communicating with their PEP customers
– keeping their PEP controls under review to ensure they remain appropriate
The review will involve engagement and feedback from UK PEPs and their family members or close associates, as well as information collected from firms and other stakeholders such as the Financial Ombudsman Service. Firms will be assessed through risk-based supervisory reviews to determine how they are implementing their policies and procedures in adherence to the law and guidance.
If significant problems are identified in the arrangements of any firm, the FCA will take prompt action to resolve those problems. The findings of the review will be published on the FCA website, and if necessary, a consultation on amending the guidance will be initiated.