Firms regulated by the Financial Conduct Authority (FCA) under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) have less than two months to ensure they have the correct financial controls in place or face regulatory action.
In March, the FCA wrote to CEOs of Annex 1 regulated firms setting out how firms are complying with money laundering regulations following an assessment of practices in the industry.
The letter highlighted several common weaknesses in financial crime controls that the FCA requires firms to address over the next six months.
The FCA stated that improvement was required in four main areas:
- Business Model. Discrepancies were noted between firms’ registered and actual activities and a lack of financial crime controls to keep pace with business growth.
- Risk Assessment. Weaknesses in business-wide risk assessments and customer risk assessments.
- Due Diligence, Ongoing Monitoring and Policies and Procedures. Lack of detail in policies creating ambiguity around actions staff should take to comply with their obligations under the MLRs.
- Governance, Management Information and Training. Lack of resources for financial crime, inadequate financial crime training and absence of a clear audit trail for financial crime related decision-making.
The FCA is one of the three UK statutory anti-money laundering supervisors in the UK and regulates 19,620 firms subject to the regulations.
Of these, around 1,000 are Annex 1 registered firms, which include some lenders, safe custody providers, money brokers and financial leasing companies. Annex 1 firms are not authorised or subject to wider FCA regulation.
The FCA gave firms six months to address the issues set out in its letter dated 5 March 2024, meaning they have until the start of September to comply.
“We expect you to complete a gap analysis against each of the common weaknesses we have outlined within six months of receipt of this letter.
“You should take prompt and reasonable steps to close any gaps identified,” wrote the FCA.
“We expect the senior manager responsible for the gap analysis to have sufficient seniority to be able to carry it out effectively. We also expect them to make sure that the gap analysis is completed promptly, and its findings shared internally and acted upon,” the letter stated.
It is likely that in future engagements with Annex 1 firms the FCA will ask firms to provide the findings from the gap analysis along with evidence of the actions firms have taken to address the gaps identified, and the progress of any remedial work and testing to show that the policies, controls and procedures are effective and working as intended.
Where firms do not take suitable steps in response to the FCA’s letter, they could face regulatory action, including possible enforcement action.
Emad Aladhal, director of a team of specialists at the FCA dedicated to reducing and preventing financial crime and fraud said: “Poor financial crime controls make it easier for criminals to abuse the financial system and damage the integrity of UK markets.
“We have made fighting financial crime a priority and though we’ve seen progress generally amongst the firms we supervise, this report highlights some basic failures amongst Annex 1 firms which are not subject to our full regulatory regime.
“These must be addressed,” said Aladhal.
Read more here.
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