The Financial Conduct Authority’s review of firms’ approaches to politically exposed persons

The UK Financial Conduct Authority (FCA) launched in September a review of the treatment of domestic politically exposed persons (PEPs) by UK-regulated financial services firms. This review will look at firms’ arrangements for dealing with domestic PEPs and the potential money laundering risks that these PEPs can pose.

Rules on the treatment of PEPs

The Financial Action Task Force (FATF) issued internationally recognised mandatory requirements in relation to the treatment of foreign PEPs in 2003, which were expanded to domestic PEPs in 2012. PEPs, according to the United Nations Convention against Corruption, are defined as both domestic and foreign “individuals who are, or have been, entrusted with prominent public functions and their family members and close associates”.

The UK and other FATF members accept that heightened controls are required around the financial arrangements of PEPs because they could abuse their position for the purpose of laundering money and committing corruption offences. The UK Money Laundering Regulations 2017 (MLRs) set out the requirements for UK firms to identify and undertake enhanced due diligence on PEPs, their family members, and close associates. 

Following this legislation, the FCA released guidance in 2017 to firms on the treatment of PEPs. This provided some clarity to firms on how they should go about identifying PEPs, the steps that they should take to assess the risks posed by PEPs and how to mitigate these. The guidance was clear that firms should only treat those in the UK who hold “truly prominent positions” as PEPs, noting that it was unlikely in practice that a large number of UK customers should be treated as PEPs.

The FCA’s review

The approach taken by firms towards PEPs in the UK has come under criticism from politicians, who have noted the inconvenience that enhanced due diligence can cause to themselves and their families when they are trying to access financial services. There has also been recent publicity around ‘debanking’ of UK PEPs. Perhaps in light of these concerns, the FCA has announced that it is undertaking a review of firms’ actions regarding PEPs and has written to UK PEPs asking them to describe their experiences with firms. The FCA is also engaging with firms to undertake a risk-based supervisory review of their practices around PEPs.

What does this review mean for UK firms?

The FCA’s review is focused on domestic PEPs and appears to be influenced by the idea that these individuals may be being treated unfairly by firms, which would conflict with firms’ FCA obligation to treat customers fairly.