The FCA has recently released the results of its latest multi-firm review of Politically Exposed Persons (PEPs). We examine what a PEP is, the findings of the review, and what it recommends for future action.
What is a PEP?
A PEP is, according to the Law Society, “someone who has been appointed by a community institution, an international body or a state (including the UK) to a high-profile position within the last 12 months”, and the scrutiny relates to the prevention of risk of bribery and corruption, particularly money laundering. Standards are set by The Financial Action Task Force that specialises in anti-money laundering and counter-terrorist financing and they have been written into domestic legislation through The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 as updated by The Money Laundering and Terrorist Financing (Amendment) Regulations 2023, which further amend the MLRs 2017 to require enhanced due diligence on domestic PEPs.
PEPs can be elected heads of state, government ministers, members of parliament, lawyers, ambassadors, and managers of state-owned enterprises. The standards also apply to Relatives and Close Associates (RCAs), and other beneficiaries of properties owned by PEPs.
The FCA’s Report
In its executive summary, the FCA explained the rationale behind its multi-firm review, highlighting the importance of applying the highest standards to people who may be targets of bribery and corruption. However, it goes on to say that these controls should also be balanced by the necessity of good customer service from financial institutions.
The FCA produced guidance in 2017 to enable financial services organisations to take a risk-based approach which is both proportionate and fair.
Recently, some members of Parliament have raised concerns that the FCA’s guidance was not being applied effectively, and a review was requested to establish whether some PEPs were being treated unfairly.
The review considered how financial institutions applied the guidance and whether they were taking a risk-based and proportionate approach to the management of PEPs, and how they were treated. Over 1,000 PEPs were contacted and 65 individual responses were received. Eventually, 15 banks were selected for customer file reviews.
The results
The conclusion of the review found a series of areas for improvement:- Definitions of PEPs and RCAs that were too wide, and wider than outlined in the regulations
- Distinct lack of processes and arrangements to assess PEP classifications after the PEP had left the Public Office
- A clear lack of rationale for PEP Risk Rating
- Despite the need to improve the firms’ policies and procedures, customer file testing did not show firms regularly applying enhanced due diligence (EDD) measures for customers
- All of the 15 firms were clear that they would not decline products or services to UK PEPs or their RCAs simply because of PEP status
- The need for enhanced improvements in staff training and communication with PEP customers.
Recommendations for Action that firms should take include: applying correct definitions to PEPs and RCAs that are consistent with the FCA’s Guidance, and reviews to ensure this happens; appropriate systems and controls to identify when a PEP ceases to become one; reviews of current arrangements to ensure customer risk methodology is compliant with the FCA’s Guidance; rejected applications or the termination of existing accounts must be made on a justifiable and risk-sensitive basis which includes appropriate governance and oversight; requests for information or records should be met with clear and effective communication detailing the reasons why decisions have been made; policies and procedures must be improved by providing detailed and practical guidance for staff.
The teams at Brighter Consultancy Limited have supported a number of firms to get their PEP activities in the right place and, as a result, have up-to-date detailed and extensive experience in this field, including multiple SMEs that can be deployed to help you get this important area right. We can do this by reviewing details of this nature on behalf of a firm. We can assist with:- Reviewing a firm’s understanding of the regulations, and making recommendations where gaps are identified, and in some instances upskilling that knowledge to raise internal standards
- Producing an holistic report on a firm’s processes, technology and compliance regarding the monitoring and maintenance of PEPs
- Including within this ‘Healthcheck’ where the risks lie, across all functions, along with remedial solutions to address them
- Producing a periodic review so that all policies and procedures are in line with ongoing regulatory updates
- Carrying our remedial action as required to bring historic activity into line with regulatory requirements.
It goes without saying that this is not a ‘nice to have’, it’s a serious regulatory requirement that can result in severe penalties for firms that don’t take it seriously, and don’t apply the right focus and support in ensuring they are ‘best of class’, or at the very least have the right levers in place to adhere to the regulations. We have seen at first hand the impact and consequences of not having invested to get this area right.
Please get in touch with us for an exploratory discussion on how Brighter Consultancy can help you on this important subject.
Simon Davis: simon@brighterconsultancy.co.uk
Dean Manning: dean@brighterconsultancy.com
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