FCA’s review of treatment of PEPs

By Aaron Nicodemus, 5 August 2024

The UK’s Financial Conduct Authority (FCA) asked banks and financial institutions ‘to do more’ to ensure that UK lawmakers and their families are not treated unfairly.

The FCA released a review [1] of findings on how effectively firms are following its guidance on the treatment of politically exposed persons (PEPs) for AML purposes. The FCA’s definition of PEPs are lawmakers, close family members, and close associates whose position puts them at higher risk of using financial tools to facilitate money laundering.

The FCA first announced [2] that it would review financial institutions’ treatment of PEPs in September in response to the Nigel Farage ‘debanking’ scandal [3], in which NatWest subsidiary Coutts closed the UK politician’s investment accounts potentially over his right-wing political views.

The FCA’s review of financial institutions’ treatment of PEPs found that most firms did not subject them to excessive or disproportionate checks, and that none would deny them an account based on their status, the regulator said in an accompanying press release [4].

However, in a small number of cases, the FCA is ‘instigating an independent and more detailed review of firms’ practices.’

Under a law adopted by Parliament, financial institutions are required to do extra checks on PEPs, following ‘global standards set by the international Financial Action Task Force and implemented by more than 200 jurisdictions,’ the FCA said.

The FCA, in conducting its review, recommended several areas where PEP checks can be improved, including: 

• by ensuring a financial institution’s definition of a PEP, family member, or close associate ‘is tightened to the minimum required by law and not go beyond that’
• by reviewing the status of PEPs and their associates ‘promptly once they leave public office’
• by communicating to PEPs ‘effectively and in line with the Consumer Duty, explaining the reasons for their actions where possible’
• by effectively considering the actual level of risk posed by the customer, and ensuring that ‘information requests are proportionate to those risks’, and
• by improving the training offered to staff who deal with PEPs.

As part of its review, the FCA received surveys from 65 parliamentarians about how they have been treated by UK financial institutions.

‘We have heard directly from some parliamentarians about the problems they and their families have faced,’ said Sarah Pritchard, FCA executive director, markets and international, in the release. ‘We have been clear where we expect firms to make improvements, including in how they communicate with their customers.’

The FCA has changed its guidance on assessing the AML risks posed by PEPs in three ways and is soliciting responses from affected institutions on the new guidance until October 18.

The new FCA guidance states that the new legal starting point is that UK PEPs should be treated as lower risk as compared to foreign PEPs; non-executive board members of civil service departments should not be treated as PEPs solely for that reason; and financial institutions should ‘give greater flexibility in who can approve or sign off PEP relationships within firms.’