The FCA’s Vigilance in Setting Fair Standards within UK Financial Services: A Closer Look at the Treatment of Politically Exposed Persons (“PEPs”)

The Financial Conduct Authority (“FCA”) is steadfast in its commitment to maintaining a UK financial system which is clean, free from corruption and guarded against financial crime. The regulator launched a review in September 2023 aimed to look carefully at firms’ frameworks for dealing with Politically Exposed Persons (“PEPs”) based in the UK. The review aims to consider how firms are:

• Applying the definition of PEPs to individuals.
• Conduct proportionate risk assessments of UK PEPs, their family members and known close associates.
• Applying enhanced due diligence and ongoing monitoring proportionately and in line with risk.
• Deciding to reject or close accounts for PEPs, their family members and known close associates.
• Effectively communicating with their PEP customers.
• Keeping their PEP controls under review to ensure they remain appropriate.

The review will report by the end of June 2024. This article explores the treatment of PEPs that may have prompted the FCA to conduct a review of firms’ frameworks around compliance and customer risk appetite.

The FCA’s Position

Legislation passed by Parliament mandates that financial institutions must conduct additional verifications on political figures, as well as their families and close associates. The standards established by the Financial Action Task Force have been adopted by over 200 countries and jurisdictions. Nonetheless, if financial firms misuse these regulations, individuals may unintentionally face exclusion from financial products or services, with what the FCA concludes as being ‘through no fault of their own’.

The FCA has implemented a series of measures to underscore the significance of industry-wide compliance with its guidance when implementing existing regulations and consequently, some firms have already modified their approach in response. Individuals also have the option to raise concerns with their financial provider or turn to the Financial Ombudsman Service.

Firms’ Duty to Comply with Consumer Duty Rules

With the FCA’s ongoing review of the treatment of domestic (UK) PEPs, it is imperative that firms elevate their client risk assessment methodologies to a more advanced level, particularly in light of recent cases in the UK where some MPs (i.e. domestic PEPs) and their family members claiming to have been denied access to financial services purely on the basis of their PEP status.  Speculation is that firms are hesitating to accommodate such individuals due to the perceived increased costs of performing enhanced due diligence measures and conducting ongoing monitoring on a more frequent basis. This hesitation has raised concern within the FCA about the equitable treatment of these legitimate individuals seeking access to financial services.

Such actions are incongruent with the FCA’s customer-focused approach and the recent introduction of the Consumer Duty. PEPs are individuals who should be categorised as retail consumers, with legitimate needs for access to financial services. Given that the Consumer Duty has been in force since July this year, it is imperative that firms not only comply with combating financial crime requirements but also have serious regard for their obligations under Consumer Duty and the relevant Principles that underpin it, particularly Principle 12 and the delivery of good outcomes.

In conclusion, the FCA remains resolute in its mission to safeguard the integrity and transparency of the UK’s financial landscape, as demonstrated through its diligent review of the treatment of PEPs. This ongoing commitment to combating financial crime, coupled with the imperative to uphold fairness and compliance, highlights the FCA’s dedication to maintaining a just and secure financial system. As the FCA’s review unfolds and firms adapt their practices, it is incumbent upon financial institutions to elevate their due diligence standards, recognising the evolving landscape and the pivotal role of equitable treatment in achieving a robust financial environment that serves all stakeholders.

How Can Complyport Help?

With the Consumer Duty in force, and firms being subjected to scrutiny on their operations under and compliance with it, it is imperative that firms to which it applies are prepared in order to mitigate regulatory scrutiny and reputational damage.

Discover the comprehensive range of services provided by Complyport, designed to guide and support firms throughout their Consumer Duty Implementation journey.

Our offerings include:

1. Online Implementation Readiness Assessment:

• • Utilise our user-friendly online questionnaires to demonstrate consideration for Consumer Duty and identify gaps and areas for improvement. This assessment serves as a foundation for developing an effective implementation plan.

1. Consumer Duty Service package:

• • Benefit from a holistic package that encompasses various elements, such as:
    • Assessment to determine the applicability of Consumer Duty to your business.
    • Templates to streamline your documentation process.
    • Compliance Monitoring tools to aid in demonstration of compliance
  • Choose from our suite of meticulously designed policy templates*, including:
    • Product Assessment Policy
    • Consumer Duty Monitoring (client version)
    • Fair Value Assessment Policy
    • Consumer Duty Diagnostic Assessment
    • Consumer Duty Annual Report

*Please note that policy templates can be customised for an additional fee.

1. Consultancy Services:

• • Access contracted and ad hoc consultancy support, both pre and post-implementation deadline. Our experts will assist you with regulation interpretation and address any personal queries, providing you with peace of mind throughout the process.

Partner with Complyport to navigate the complexities of Consumer Duty Implementation seamlessly. Our tailored solutions and expert guidance will empower your firm to meet regulatory requirements effectively. Contact Thomas Salmon via email at thomas.salmon@complyport.co.uk to book a free consultation.

About Complyport

Complyport is a market-leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.

Complyport can assist with the preparation of a GAP analysis and impact assessment on the investment firm’s capital adequacy and risk management framework of the Company under the regulatory framework.

We specialise in supporting the UK financial services industry with compliance guidance, advice and best practice.

• Consumer Duty implementation advice
• Financial Crime support and Forensics
• Prudential support, IFPR, ICARA and financial resilience advice
• Operational resilience & Cybersecurity advice
• Financial Promotions guidance, support, and management software solutions
• CASS advice and protections of client assets
• Comprehensive compliance work-flow management software
• Compliance managed services and resourcing compliance personnel
• Skilled Person Reviews and Regulatory Investigation

Contact Thomas Salmon in our Regulatory Solutions team via email at: thomas.salmon@complyport.co.uk to book a free consultation.