FCA Provides Further Guidance on the Treatment of PEPs

The FCA's multi-firm review followed concerns that firms might be applying the Guidance in a disproportionate way and therefore requiring excessive information from prospective customers or even refusing to provide services entirely.  

The findings and the proposed changes to the Guidance scrupulously avoid using the term "debanking", despite the political and media concern about that topic having been the original trigger for the review. In addition, the review stresses right from its first paragraph that this is UK legislation implementing global standards – in other words, not FCA rules and therefore not an area in which the FCA has entirely free rein.    

The review (which only included 15 firms in its more detailed phase) largely focused on the retail banking and payments sectors, including consumer credit firms and e-money institutions.  However, the FCA's findings will be relevant to all firms supervised by the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). Private banks and wealth management firms, in particular, may have PEPs (or potential PEPs) within their client bases.  Alternative asset managers are less likely to have direct PEP investors in their funds but the ultimate beneficial owners of some investors may be PEPs, whilst on the transaction side, the PEP status of counterparties on deals and members of management teams may need to be considered.

Moreover, and notwithstanding the previous coverage of the issue, it is notable that the FCA contacted more than 1,000 PEPs to enquire into their experiences with firms, and received only 65 responses.

The FCA's findings included the following issues:

• Firms defining PEPs (and relatives and close associates (RCAs)) more broadly than required under the MLRs and the Guidance.
• No effective arrangements to ensure that the PEP classification remains appropriate once the PEP leaves office.
• Not considering the customer's individual circumstances as part of the risk assessment or automatically treating all PEPs as high-risk.
• Unclear customer communications with insufficient detail on why customers were being asked for certain information.
• Need for improved staff training with more practical examples.
• Policies not updated to reflect the recent change to the MLRs requiring UK PEPs and RCAs to be treated as lower risk than a foreign PEP (assuming no enhanced risk factors).  This was a particular issue for firms operating on the basis of global policies and procedures.

In a "small number of cases", the FCA is requiring a skilled persons report and (it appears) "remediation" – given the relatively small number of firms in scope, this should reinforce the need for firms outside the review to ensure their processes and documents would stand up to equivalent scrutiny.

More positively, the FCA also highlighted some areas of good practice including specific monitoring rules for PEPs and proportionate sign-off procedures.  It also found in a few instances that some of the perceived widespread bad practices of firms were not entirely supported by the evidence.  For example, the FCA only found a small number of disproportionate information requests and did not see any cases of customers being rejected or accounts closed simply due to PEP status.

All firms will need to consider the findings and, where necessary, make any necessary changes.  These could include:

• Updates to anti-money laundering policies, procedures and controls in order to ensure that these meet the FCA's expectations and reflect its view of good practice.   For example, using definitions of PEPs and RCAs which reflect the MLRs and the Guidance and adopting procedures to identify when a PEP leaves office.
• Changes to staff training, potentially including case studies and examples of good and poor practices.
• Changes to communications with customers including clear explanations for information requested and ensuring that these comply with the Consumer Duty. Firms subject to the Payment Services Regulations 2017 (PSRs), such as banks, payment service providers and e-money institutions, will doubtless be aware that the previous Government had proposed to amend the PSRs where the firm was terminating a framework contract with a customer, to require both a longer notice period than in the PSRs at present, and a detailed explanation as to the reason for the termination. The new Government's plans for that legislation are not clear, but, in the light of this review, firms should review any templates they use and satisfy themselves that they comply with requirements of the consumer understanding outcome within the Consumer Duty.
• Where a firm operates under group-wide anti-money laundering policies, ensuring that the UK requirements are appropriately applied.

In some cases, this may require the firm to change its approach to PEPs which may involve some questions of judgment and potentially an acceptance of greater risk.

As part of the multi-firm review, the FCA also considered whether any changes were needed to the Guidance.  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.  However, the drafting in the Guidance on this point is not particularly clear.
• 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.

If you would like further information or assistance in understanding the proposed changes, please speak to your usual Travers Smith contact or any of the individuals below.