FCA Dear CEO Letter Urges Annex 1 Firms to Address Financial Crime Weaknesses by September 2024
In its Dear CEO letter published Tuesday 5th March 2024, the Financial Conduct Authority (FCA) announced that it has found significant flaws in the financial crime prevention frameworks of Annex 1 firms, resulting in an epidemic of financial crime failings.
Annex 1 firms are categories of businesses registered for separate FCA anti-money laundering supervision that do not fall under standard FCA authorisation. This includes businesses that offer finance leasing or provide payment services, and does not include money service businesses.
The FCA has given these firms six months to conduct a gap analysis of their financial crime framework and address the issues identified in their letter.
The FCA has also announced that it will increase its supervision of Annex 1 firms and act against those that fail to comply with The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs).
Sweeping Financial Crime Failings Identified by the FCA
The FCA has identified the following weaknesses in Annex 1 firms:
Business Model: Many firms do not clearly state or understand the Annex 1 activities they undertake or update their financial crime framework as their business grows. The FCA expects firms to have a consistent and accurate business model.
Risk Assessments: Some firms do not have a Business Wide Risk Assessment (BWRA) or a Customer Risk Assessment (CRA) that are tailored to their specific risks and clients. The FCA expects firms to review, update and implement their BWRA and CRA to comply with the MLRs and FCA’s letter and guidance.
Policies and Procedures: Firms do not have detailed and clear policies and procedures for customer due diligence (CDD), monitoring and reporting of suspicious activities (SARs). The FCA expects firms to have policies and procedures in place that are, once again, compliant with the MLRs and document their monitoring and SARs.
Governance and Training: Firms are not allocating enough resources for financial crime prevention, adequate staff training or the internal audit function. This has resulted in employees failing to demonstrate sufficient awareness during interviews with the FCA and insufficient audit trails to support decisions related to financial crime. The FCA expects firms to have a dynamic approach to training, a standing agenda item for financial crime in senior management meetings and an independent audit function with sufficient resources to assess and implement policies, controls and procedures.
Next Steps for Annex 1 firms
The FCA has warned Annex 1 firms that they must complete a gap analysis by 5th September 2024 and take prompt and reasonable steps to address any gaps. The Regulator may ask to see the gap analysis and the actions taken, and will intervene if firms do not comply with FCA’s letter.
FCA’s letter is also transparent; the gap analysis is the first step towards a robust financial crime framework, but it is not enough. Combating each weakness will require Annex 1 firms to be proactive and adopt a risk-based approach to financial crime, transforming their internal frameworks and building a culture that impedes financial crime.
How Complyport Can Help
At Complyport, our team of financial crime experts can assist you in conducting your gap analysis, drafting and implementing relevant policies, procedures, risk assessment and provide bespokre remediation support.
Our tailored support will help build a strong foundation for your Annex 1 activity.
Get in Touch Now
Contact us today to learn how we can help you conduct your gap analysis and stay ahead of the deadline this September. Complete the form below to book a free consultation.
