Regulation Update: FCA Review Concludes that Financial Services Firms Need to do More to Ensure Domestic PEPs are Treated Fairly

The Financial Conduct Authority (FCA) has published its long-awaited review into the treatment of politically exposed persons (PEPs) - delayed as a result of the UK general election in June.

The key finding is that financial services firms need to take action to improve their treatment of domestic PEPs – including MPs, public servants, and their relatives/associates (RCAs).  

It has also launched a consultation into amendments to current PEP guidance to reflect that UK PEPs should be treated as lower risk, but warned firms to take action now to improve their processes, rather than waiting to act once it has been published in October 2024.

The FCA’s domestic PEP conclusions

The FCA found that some firms do not have:

• An effective procedure to conduct PEPs reviews (i.e. continuous PEP monitoring) to ensure that classification remains relevant and appropriate after an individual has left office.
• An appropriate risk assessment methodology taking into account all relevant risk factors and individual circumstances.
• Adequate process for data collection and therefore made disproportionate or excessive information requests.
• Enough clarity and detail in their communications with PEPs.
• The right training to ensure staff understand PEP procedures and achieve consistency in customer treatment.

Three key PEP actions financial services must take now

Firms must:

• Review and update the PEPs policies, procedures and controls in line with the updated guidance and deliver a risk-based and proportionate approach for the treatment of PEPs and RCAs.
• Communicate with PEPs and RCAs in a manner that is clear, effective and compliant with the Consumer Duty regulation.
• Make sure all staff are trained on the application of revised policies, procedures and controls.

A key point to note moving forward is that under the proposed new guidance that FCA will make amendments to ensure that the starting point for an any risk assessment of a domestic PEP is that they pose a lower risk than a foreign PEP.

Why a risk-based approach to the treatment of domestic PEPs is vital

Forming a risk-based approach to the identification, classification, and monitoring of PEPs can help financial services firms ensure that their treatment of domestic PEPs is not only fair and proportionate, but in line with their wider risk appetite and strategy, as well as Consumer Duty and AML compliance requirements.  

Enhanced Due Diligence (EDD) that draws upon a wealth of third-party data  (individual and RCA insights, KYC data, UBO and company structure information, industry and jurisdictional knowledge, financial checks, source of wealth, adverse media screening and relevant other indexes) is vital to the successful treatment of domestic PEPs – assisting in a number of ways including undertaking comprehensive risk assessments, delivering efficient onboarding experiences, and achieving continuous monitoring of individual PEPs.  

How can FullCircl help financial services firms get ahead of PEP regulation?

FullCircl's Anti-Money Laundering (AML) software can help financial services firms respond to the need to undertake different levels of risk assessment for domestic and foreign PEPs and sanctions – assisting with the delivery of robust yet proportionate action for each - via a single API integration.

Financial service firms can:

• Split out foreign and domestic PEPS, as well as regional, current and former PEPs and RCAs.
• Undertake automated assessments across a much broader spectrum of civil servants, political party officials, senior members of the police force, city mayors, national NGO officials, political pressure and labour group officials, without the need for excessive information requests.  
• Apply global law enforcement wanted lists, regulatory enforcement actions, global adverse media screening and global sanctions list.

As a result, firms can communicate and conduct business with PEPs and RCAs in a manner that is compliant with both AML and Consumer Duty regulation.

For more information on how to effectively conduct checks of domestic and foreign PEPs contact us to book a demo.