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FCA gives Annex 1 firm managers six months to review financial crime records

Recent assessment work by the UK’s Financial Conduct Authority (FCA) in relation to financial crime controls at Annex 1 firms underscores the importance of senior management involvement in implementing and reviewing their firm’s controls, an expert has said.

The FCA recently issued a warning (8 pages / 138 KB) to ‘Annex 1’ firms - businesses that undertake a particular range of activities, such as certain lenders, safe custody providers, money brokers, and financial leasing companies - about common failings it had identified in financial crime controls  it had reviewed.

Following the letter Jonathan Cavill, financial services regulation expert at Pinsent Masons, said: “Annex 1 firms should proactively conduct the required gap analysis, implement necessary adjustments, and prepare to demonstrate their compliance efforts and the efficiency of their financial crime frameworks to the FCA.”

The FCA has been assessing compliance with anti-money laundering regulations by Annex 1 firms it reviewed, finding shortcomings in a number of critical areas. The authority warned that such failings could potentially expose the UK’s financial system to criminal activity and undermine the integrity of the UK’s financial markets. In the letter the FCA also reminded CEOs of the range of powers available to it in respect of poor financial crime policies, controls and procedures, such as its powers to fine, impose third party reviews and remove Annex 1 registration.

Issues were identified during the FCA’s assessments in four critical areas: business models; risk assessment; due diligence, ongoing monitoring, and policies and procedures; and governance, management information, and training.  The letter described the FCA finding mismatches at some firms between the activities the firm was registered for carrying on and those actually undertaken, and examples of inadequate risk assessments, poor customer due diligence, lack of clarity in monitoring policies and procedures and those for investigating and reporting suspicious activity not being properly documented.

Andrew Barber, financial services regulation expert at Pinsent Masons, said “Senior management at Annex 1 firms should pay particular attention to the examples of control failings the FCA found in its assessment work and the steps it expects firms to take which it has set out in the appendix to the ‘Dear CEO Letter’. Although this is not an exhaustive list the FCA has provided the appendix as a basis for firms to use in assessing their own controls. With the FCA starting the clock on the six-month time period for Annex 1 firms’ management to conduct gap analysis firms’ management must be proactive now, by acting promptly and plugging gaps.” 

Following the FCA’s letter, senior managers of Annex 1 firms are urged to consider their firm’s existing financial crime prevention measures to assess whether these meet the FCA’s expectations and comply with the money laundering regulations. Firms are required to take steps to update and improve their financial crime policies, controls and procedures. These measures must meet the requirements of money laundering regulations as well as addressing company- specific risks, such as to ensure financial crime resources remain appropriate where a firm has expanded substantially in a short time. The FCA warns firms in the letter that it expects management to complete the gap analysis against the weaknesses described in the letter within six months of receipt of the letter.

Businesses are also urged to provide regular training for staff to ensure compliance with anti-money laundering practices. This can ensure staff are well-equipped to identify and report suspicious activities.

The FCA is likely to ask Annex 1 firms about the gap analysis and improvements made, such as to policies, meaning evidence of remediation identified and put in place and of how processes are working should be readily available. Failure to meet these expectations could result in regulatory action to address financial crime risks.

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