In this article, we look at the FCA's expectations from regulated firms with regards to managing their financial crime risks. We explore the intricate landscape of governance, risk mitigation, and the crucial role of senior management, providing insights to not just meet but exceed the FCA's expectations in financial crime compliance. Firms are required to satisfy the FCA that they have robust governance, effective risk procedures and adequate internal control mechanisms to manage their financial crime risks.
In the intricate landscape of the UK financial sector, the Financial Conduct Authority (FCA) places requirements on regulated firms to mitigate the risk of financial crime. This article explores the FCA's expectations on financial crime compliance, underscoring the requirement for firms to establish robust systems and controls.
Meeting FCA standards
Regulated firms shoulder the responsibility of demonstrating robust governance, effective risk procedures, and internal control mechanisms capable of managing financial crime risk. The FCA mandates financial crime compliance with these standards not merely as a regulatory checklist, but as an integral contribution to the overall integrity of the financial markets.
Designing effective systems and controls
Effective systems and controls are important in the fight against financial crime. Firms must view these measures not just as compliance obligations but as strategic investments safeguarding against the ever-evolving landscape of financial crime threats. Detecting, preventing, and deterring financial crime becomes manageable through the implementation of comprehensive systems.
Tailoring your approach
Firms are required to tailor their systems and controls to their business complexity, scope of services and the unique nature and scale of their operations. The FCA encourages adaptability to ensure the effectiveness of approaches to financial crime compliance and risk management.
The role of senior management
Active engagement from senior management is important in successfully managing financial crime risks. Clear responsibility, a thorough understanding of the firm's financial crime risks, and fostering organisational structures that promote coordination and information sharing across the business are what the FCA expects from firms.
Appropriate and tailored policies and procedures
The FCA has emphasised the need for firms to establish and maintain bespoke policies and procedures. Accessibility and comprehensibility for all staff is key. The expertise of staff, regular competence reviews, and appropriate actions to maintain ongoing competency are an important part of building a comprehensive financial crime compliance framework.
Staff training in financial crime compliance is important for establishing a resilient defense against financial crime risks. Implementation of thorough training and awareness initiatives is not merely a regulatory requirement but also plays a key part in safeguarding the integrity of your business operations.
Tailoring training programs to address specific financial crime risks equips your staff with a good understanding of their pivotal role in mitigating the threat of financial crime.
Money Laundering Regulations
In January 10, 2020, significant changes were introduced to the Government's Money Laundering Regulations (MLRs), aligning the UK's Anti-Money Laundering (AML) regime with international standards set by the Financial Action Task Force (FATF) and incorporating the EU's 5th Money Laundering Directive.
Regulation 33 of the MLRs has been amended to include additional high-risk factors for enhanced due diligence. These factors may trigger the need for additional information and monitoring in specific cases, including transactions with parties in high-risk third countries, customers benefiting from life insurance policies, and third-country nationals seeking residence rights or citizenship through capital transfers, property purchases, or investments in corporate entities.
Non-face-to-face business relationships or transactions without certain safeguards, such as electronic identification processes, are also highlighted.
Financial sanctions are a crucial aspect of regulatory compliance, and firms must be vigilant to ensure adherence to these measures.
Understanding financial sanctions
Financial sanctions are governmental measures applicable to individuals, entities, and governments, whether resident in the UK or abroad. These sanctions orders restrict firms from conducting transactions with designated persons or organisations.
Obligations and criminal offenses
It is essential for firms to comply with financial sanctions to avoid criminal offenses, unless they possess a valid license or authorisation from the Office of Financial Sanctions Implementation (OFSI). Firms must be aware that failure to comply is a criminal offense, and they should refer to the OFSI's website for the latest information on current financial sanctions.
FCA's expectations and notification requirements
Under Principle 11, authorised firms and those under the temporary permissions regime (TPR) are expected to notify the Financial Conduct Authority if they, their appointed representatives (ARs), or agents are subject to sanctions. This includes electronic money institutions, payment services firms, cryptoasset businesses, and annex I financial institutions.
Firms can notify the FCA in accordance with SUP 15 requirements through standard reporting mechanisms. Essential information to be provided includes the country imposing the sanctions, the relevant sanctions regime, the effective date of the measures, entities affected by the sanctions, and an analysis of how the sanctions impact the firm's activities. Additionally, firms should disclose any relevant general or specific licenses issued by relevant authorities.
Obligations under the Proceeds of Crime Act 2002
Firms are mandated by the Proceeds of Crime Act 2002 to submit Suspicious Activity Reports to the National Crime Agency if they know or suspect any involvement in money laundering. The MLRs, as amended, extend their reach beyond traditional financial institutions to include a spectrum of firms such as investment managers, stockbrokers, e-money institutions, payment institutions, and more.
Risk-based customer due diligence
The cornerstone of AML and CFT compliance lies in risk-based customer due diligence measures. Firms must undertake comprehensive risk assessments tailored to their business size, offered products, geographical reach, and customer demographics. This ensures that preventive measures are commensurate with the identified risks.
To bolster AML systems and controls, the FCA mandates firms to assign overall responsibility for AML systems to a director or senior manager. Additionally, the appointment of a Money Laundering Reporting Officer (MLRO) is required to supervise the firm's compliance with AML obligations. Clear lines of responsibility and supervision ensure effective risk mitigation.
Ongoing risk assessment
Central to AML obligations is a continual risk assessment of the firm's business. This assessment, kept up to date, forms the basis for developing and maintaining effective prevention procedures. Regular monitoring ensures that the procedures remain appropriate as the business evolves.
In conclusion, navigating the realm of AML and CFT requires a comprehensive understanding of evolving regulations, robust risk assessments, and proactive adherence to regulatory expectations. By adopting a risk-based approach and leveraging available guidance, firms can strengthen their AML defences.
About Buckingham Capital Consulting
Buckingham Capital Consulting is a leading specialist provider of financial crime compliance services.
Since our establishment in 2013, we have been dedicated to assisting businesses in navigating their most critical areas related to financial crime. Our comprehensive suite of services includes expertise in authorisation applications, compliance solutions, tailored training programs, strategic consulting, and advisory services.
We focus on a number of sectors, including, banking, e-money, payment services, investment services, consumer credit, crypto-assets, insurance, mortgages, and open banking, we bring a wealth of industry-specific knowledge to address compliance challenges.