IMPORTANT: FCA Regulatory Update

Financial crime clampdown from FCA

Image: MIT Sloan Management Review

The Financial Conduct Authority (FCA), the UK’s financial regulator, has sent a serious warning to financial institutions (FIs) after discovering widespread shortcomings in how they prevent financial crime, including money laundering, terrorist financing and proliferation financing.

This week, the FCA released compliance failings from so-called ‘Annex 1 firms’ - FIs that are not subject to the FCA’s full regulatory regime, but still conduct some regulated activities. Annex 1 firms include safe custody providers, money brokers and financial leasing companies and certain lenders. A full list of Annex 1 firms can be found here. The compliance failings partly stem from uncertainty around which financial crime regulations are applicable to Annex 1 firms, which are supervised under the terms of The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, and are not authorised firms pursuant to the Financial Services and Markets Act 2000, nor are they money service businesses.

Key areas of concern outlined by the FCA include discrepancies between a firms’ business activities and what they actually do. The FCA stated that some firms had failed to properly notify it about changes to their business. Another concern identified was the absence of business-wide risk assessments in identifying and mitigating financial crime, with Annex 1 firms demonstrating a lack of understanding toward the risks they face.

Ultimately, the shortcomings mean that some FIs are exposed to criminal activity such as money laundering, which could lead to regulatory enforcement action.

In response to the findings, the FCA has ordered the chief executives of all Annex 1 firms, by letter, to conduct a gap analysis review within six months from the release of the findings (5 March, 2024) and identify any shortcomings in their financial crime detection and response frameworks. The full letter can be found here.

A spokesperson from the FCA noted:

Protecting the UK financial system from abuse by criminals is a top priority. While many firms have strong controls, we've found too many falling short of standards. Firms must raise their game on anti-money laundering or face regulatory consequences.

The financial crime clampdown from the FCA comes at a time where FIs are experiencing record financial crime compliance costs. According to data from Forrester Consulting, financial crime compliance costs increased for 98% of FIs in 2023 compared to the previous year, with FIs in Europe, Middle East and Africa (EMEA) incurring costs of $85 billion. At a time where financial crime compliance is becoming more expensive, regulatory fines for not meeting financial crime requirements would, from a cost standpoint, be a double-whammy for FIs.

If you would like to further understand the implications of this FCA development, or seek advice on what anti-money laundering controls to implement, please reach out to GreySpark here.