Domestic PEPs – what does the FCA review mean for firms?
The treatment of Politically Exposed Persons (PEPs) – in particular, domestic PEPs - when accessing financial services in the UK has been a recent subject of debate.
This is, perhaps in part, due to the media attention surrounding the former UKIP and Brexit party leader Nigel Farage, who revealed that his accounts at private bank Coutts (owned by NatWest) had been closed. He was told the closure was a “commercial decision”, but he suspected it was linked to other factors, including his public profile.
In the wake of this de-banking controversy, the FCA has announced that it is reviewing the treatment of domestic PEPs by financial services firms. The review, which will consider the issue in the context of the requirements set out in the UK Money Laundering Regulations and the associated FCA guidance, is expected to conclude by the end of June 2024.
The regulatory requirement
Under the UK’s Money Laundering Regulations, relevant persons (including authorised firms) are required to apply customer due diligence when establishing a business relationship. This involves taking steps to identify customers and check they are who they say they are.
There is a further obligation to conduct enhanced customer due diligence in certain circumstances including when the customer or potential customer is a PEP, or a family member or known close associate of a PEP.
This recognises that people entrusted with prominent public functions may be able to abuse their public office for private gain and may use the financial system to launder the proceeds of this abuse of office.
The Regulations require firms to determine whether a customer or the beneficial owner of a customer is a PEP (or a family member or a known close associate of a PEP) and to manage the risks arising from the firm’s relationship with those customers.
The Regulations state that where a firm proposes to have (or to continue) a relationship with a PEP or a family member/known close associate of a PEP, it is required to:
- Conduct enhanced due diligence (EDD)
- Have approval from senior management for establishing or continuing the business relationship
- Take adequate measures to establish the customer’s source of wealth and source of funds
- Conduct enhanced ongoing monitoring of the business relationship
Enhanced Due Diligence is necessarily more intrusive, including taking adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship or transactions with that person.
It should also be risk-based and the FCA guidance on PEPs, published in 2017, emphasises that firms must take a proportionate and risk-based approach when dealing with PEPs. It makes it clear that, in the absence of other risk factors, domestic PEPs and their family members/close associates, should be treated as ‘lower risk’.
This means that when conducting the required Enhanced Due Diligence for domestic PEPs, firms should use information that is reasonably available to them, including information in the public domain, and take less intrusive steps to establish their source of wealth than they use for other, non-domestic PEPs.
What is the problem?
There is evidence to suggest that some firms have adopted a “one size fits all” approach to both domestic and foreign PEPs, creating a danger that the way that Enhanced Due Diligence measures are being applied to domestic PEPs is excessive.
This could lead to inconvenience and frustration. Individuals may even find themselves excluded from products or services through no fault of their own.
Some of the frustrations were summed up by Baroness Hayter of Kentish Town in a House of Lords debate in Nov 2021:
“….(domestic) PEPs get this ridiculous six-page questionnaire, which I have just received, wanting to know about my past employers, my family wealth—I have not got any—my lottery wins, my jewellery, and not just my car but “cars”; I have only got one. Many of your Lordships have approached me to say that they and their families have been similarly inconvenienced.”
What is happening to address the issues?
The Financial Services and Markets Act of 2023 included (under section 78) a requirement for the FCA to review its guidance on PEPs. In particular, the FCA must consider the extent to which its guidance is being followed, and whether it remains appropriate or should be revised.
The FCA started that process on 15 August 2023, with a letter inviting UK PEPs to share their experiences, including any problems they or their family members have encountered.
This was followed by a formal review announcement on 5 September 2023. The FCA will assess how firms are meeting the anti-money laundering legislation and its guidance to conduct proportionate and risk-based due diligence on their clients. In particular, the review will look carefully at firms’ arrangements for dealing with PEPs based in the UK.
The review will report by the end of June 2024, and the FCA will take prompt action if any significant deficiencies are identified in the arrangements of any firm assessed.
What should firms do?
Pending publication of the FCA report, it would be prudent for firms to review their procedures in relation to domestic PEPs and ask themselves whether they are complying with the existing guidance. In particular, for domestic PEPs assessed as lower risk, the extra EDD measures adopted should not be excessive.
Firms should adopt what might be described as a “Goldilocks approach” to domestic PEPs, ensuring that their Enhanced Due Diligence is not too much, nor too little, but just right.
The Virtual Compliance Mentor
In this preview, Bruce Viney provides an overview of the legal terminology and the practical things to consider when assessing whether a customer is a PEP. To view the full video and more videos relating to PEPs, get in touch.
The Virtual Compliance Mentor (VCM) consists of a library of short video tutorials and other learning resources that enable the Compliance & FCC team to access learning as and when they need it.
About the Author
Martin qualified as an accountant with the Institute of Chartered Accountants of England and Wales (ICAEW) with a forerunner of the global accountancy firm Ernst & Young in London. After qualifying, Martin started training others, initially training aspiring accountants and then moving into training in the City of London. Martin rose to become Managing Director of a substantial City of London training entity, with a full-time faculty of 15. During his tenure, Martin also began training internationally – particularly in the Middle East and Asia.
During the internet boom, Martin became heavily involved in e-learning and developed a ‘blended’ learning course for the CISI’s Certificate in Securities whilst working as Global Head of Content at venture capital funded firm, Wide Learning.
Martin then spent two years at the Chartered Institute for Securities & Investment where he was an Associate Director and ran the publications division, the business development team and numerous train-the-trainer courses. Martin is a Fellow of the Chartered Institute for Securities & Investment (CISI) and continues to be very active there, particularly as the senior editor for a number of the CISI’s official workbooks.