An Overview of the Regulatory Horizon for PEPs

In July 2024 the Financial Conduct Authority (FCA) published the results of its multi-firm review on how firms deal with politically exposed persons (PEPs) when conducting anti-money laundering checks. 

The review includes the FCA's  findings on how effectively firms are following current FCA guidance in FG 17/6 (Guidance) on the treatment of PEPs. The FCA states it wants a system that is proportionate so that public servants are not unfairly denied access to the financial products and services necessary for everyday life, or to disproportionate delays and requests for information. 

The FCA have looked at how firms apply the definition of PEPs and RCAs to individuals and assessed how firms are set up to take a risk-based and proportionate approach in their management and treatment of UK PEPs and RCAs, in accordance with their Guidance. The FCA contacted over 1,000 PEPs and received 65 individual responses.  

The FCA found that most firms had systems and controls designed to implement their Guidance. However, they identified there was room for improvement in all the firms they assessed. The key areas of improvement are: 

1. Some firms included definitions for PEPs and RCAs that are not in line with the regulations and their Guidance  
2. Some firms did not have effective arrangements in place to review PEPs and RCAs to ensure the PEP classification remained appropriate after the PEP had left public office  
3. A small number of firms did not effectively consider the customer’s actual risk in their assessment and rating, that is the actual level of risk posed by PEPs that should be carefully considered, rather than applying blanket EDD measures.  
4. Firms need to improve the clarity and detail of communications with PEP and RCA customers, so that customers could understand what they were being asked to do and why.  
5. Firms needs to improve staff training 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.  

While the FCA have given the firms in this review detailed feedback on the remediation needed, they encourage all firms to draw relevant lessons from the review’s findings. In particular, the FCA expects all firms to:   

Review their current arrangements (policies, procedures, controls) for the risk management and treatment of PEPs and RCAs against these findings. Their current arrangements must reflect the legislative position, effective from 10 January 2024, which makes clear that UK PEPs and RCAs should be considered as presenting a lower level of risk if no enhanced risk factors are present.  

The FCA provides a framework for distinguishing between lower and higher risk PEPs: 

• Lower risk indicators: PEPs may pose a lower risk if they are subject to rigorous public scrutiny, lack executive decision-making power, or have ceased to be PEPs for over a year. In such cases, firms may adopt less intrusive due diligence measures.  
• Higher risk indicators: PEPs who display wealth inconsistent with known income, face credible allegations of misconduct, or are involved in large, non-transparent public procurements may require more stringent EDD.  

The FCA requires Firms to implement adequate EDD measures for PEPs, including: 

• Business relationship approval: Senior management must approve the establishment of business relationships with PEPs.  
• Source of wealth and funds verification: Firms should take adequate steps to verify the PEP’s source of wealth and funds, adapting the intrusiveness of these measures based on the assessed risk.  
• Ongoing monitoring: Continuous monitoring of the PEP, promptly ceasing to apply any enhanced measures once they leave office to family and close associates, and then less frequent formal reviews. Firms can do this through periodic reviews, transaction monitoring or alert systems.  

The FCA concluded that the Guidance remains appropriate, and no significant changes are needed.  However, it did consider that there is some room for improvement in the way that firms supervised by the FCA under the MLRs implement the Guidance in practice, and is therefore consulting on a number of changes. These include:  

• Clarifying that non-executive board members of civil service departments should not be treated as PEPs (unless they already meet the definition of a PEP in another capacity). 

• Allowing PEP relationships to be signed off by other senior functions and not the Money Laundering Reporting Officer (MLRO), provided that the MLRO has oversight of all PEP relationships within the firm, giving greater flexibility in who can approve or sign off PEP relationships within firms, not limited to senior management 

• An expectation that where the firm is required to apply the MLRs to its group, UK PEPs are treated as lower risk across that group, unless not permitted by local law in a particular jurisdiction.  

• Other updates to reflect changes in legislation, including the requirement for UK PEPs and RCAs to be treated as lower risk and guidance on the treatment of persons who are both a UK PEP and a foreign PEP. 

The FCA expects all firms to consider these findings and make any necessary changes. The consultation on these changes closed on 18 October 2024, however, firms are encouraged to make appropriate changes where required. 

As we move forward from the FCA's review and the recent consultation, it’s crucial for firms to not only ensure compliance with existing guidelines, but also to embrace the spirit of the FCA's recommendations. The review highlights significant opportunities for improvement in how firms classify and manage PEPs and RCAs. By adopting a more nuanced and risk-based approach, organisations can better navigate the complexities of PEP relationships, while maintaining access to essential financial services for public servants.

The FCA’s emphasis on proportionality and clarity in communications underscores the need for firms to foster a deeper understanding of PEPs within their teams. This includes providing robust training that incorporates practical examples and real-world scenarios to enhance staff competence and consistency in customer treatment.

As we continue to adapt to these regulatory changes, we encourage all firms to take proactive steps in reviewing their policies, procedures, and controls in light of the FCA’s findings. Engaging in industry discussions and sharing insights will also be vital in collectively advancing our compliance practices. By doing so, we can foster a more transparent, efficient, and equitable financial ecosystem that serves the needs of all customers, including those who are politically exposed. 

If your firm needs support navigating these changes, don’t hesitate to reach out to CW Compliance. Our team of compliance and regulatory experts are ready to assist you with tailored solutions, whether it’s policy development, staff training, or risk management frameworks.