U.K. Financial Firms Face Scrutiny Over Inconsistent Implementation of PEP Guidelines, Warns FCA

The U.K. Financial Conduct Authority (FCA) has raised concerns over the inconsistent application of its guidance on politically exposed persons (PEPs) in relation to anti-money laundering (AML) practices across the financial services industry. In a recent review, the FCA highlighted significant shortcomings and warned firms of the potential reputational damage that could arise from enforcement actions.

The FCA’s findings, published last month, reveal that financial institutions need “to do more” to ensure that U.K. lawmakers and their families are not subjected to unfair treatment. The regulator emphasized the importance of firms checking that their “policies, procedures, and controls are in line with our guidance,” as stated in a July 18 press release.

Firms are also advised to prepare for upcoming revisions to the guidance, reflecting changes to the Money Laundering Regulations (MLR) that took effect in January. The consultation on these clarifications is set to close on October 18.

The FCA identified several critical failings in its review. Among these were the use of overly broad definitions for PEPs and their relatives or close associates (RCAs), inconsistent assessments of whether PEP classification remains appropriate after a PEP has left public office, and failures to consider the actual risk posed by customers in their assessments. Other issues included a lack of clear rationale for risk ratings, insufficient detail in communications with PEP and RCA customers, inadequate staff training, and outdated policies that fail to treat U.K. PEPs and RCAs as lower risk compared to foreign PEPs, unless other risk factors are present.

Tim Lewis, head of financial services and markets at law firm Travers Smith, advised that “firms review their PEP procedures in light of the FCA’s findings.” He highlighted that this is particularly crucial for banks and payment services firms but relevant for all financial entities. Lewis recommended that firms ensure their PEP and RCA definitions align with the MLRs and the FCA’s 2017 guidance. He also suggested adopting procedures to identify when a PEP leaves office, updating staff training with case studies, ensuring U.K. requirements are applied within group-wide AML policies, and improving communication with customers regarding PEP status inquiries to comply with the Consumer Duty.

Iain Armstrong, regulatory affairs practice lead at ComplyAdvantage, echoed these concerns, noting that the FCA’s review might prompt firms to re-evaluate every U.K. PEP currently on their records and decide whether to declassify them or retain their PEP status. He stressed the need for compliance leaders to take three key steps: identify if new U.K.-specific policies are needed, evaluate the quality and scope of their PEP data, and review the implications for frontline staff, including establishing appropriate guidance and training.

Armstrong also warned of the potential for regulatory scrutiny to escalate. “While there are no precedents for firms being fined for not doing enough to serve PEP customers, mechanisms certainly exist for the regulator to issue such fines,” he said. He added that firms should be cautious, as scrutiny in one area could lead to further examination in other areas, consuming time and resources and potentially leading to reputational damage if an enforcement notice links the firm to misconduct.

By fLEXI tEAM