PEPs and the FCA review and best practices

In July 2023, the UK government called on the Financial Conduct Authority (FCA) to review its guidance on risk management for politically exposed persons (PEPs). As a result, the regulator has outlined the key areas it will examine in its review of how financial services companies deal with PEPs who are based in the UK.

The government’s request for the review came amid reports that some financial institutions (FIs) are restricting the access of PEPs and their associates to financial services.

• https://www.fca.org.uk/news/press-releases/fca-launches-review-treatment-politically-exposed-persons

What Will the FCA’s Review Include?

Although the FCA cannot modify the regulations that establish the PEPs framework, the regulator’s review will examine how firms:

• Apply the definition of PEPs to individuals.
• Conduct appropriate risk assessments for UK-based PEPs, family members, and close associates.
• Implement enhanced due diligence (EDD) and ongoing monitoring procedures according to the level of risk.
• Decide whether to reject or close accounts for PEPs, their family members, and close associates.
• Communicate effectively with their PEP customers.
• Continuously review and adjust their PEP controls to ensure they remain adequate.

The FCA will present its findings by June 30, 2024. If the review discovers significant shortcomings in the procedures of any firm under assessment, the FCA will take swift corrective measures.

In a statement, Executive Director of Markets at the FCA, Sarah Pritchard, emphasised that current PEP regulations align with global standards and aim to prevent corruption, maintain a clean financial system, and curb financial crime. Pritchard also stressed the importance of implementing these rules fairly and proportionately, so they do not hinder public servants or their families.

• https://www.fca.org.uk/news/press-releases/fca-launches-review-treatment-politically-exposed-persons

The FCA has already convinced some firms to improve their practices, and the upcoming evaluation will help identify whether additional guidance is necessary.

PEP Risk Management Best Practices

Firms looking to establish a robust PEP screening process that will bolster their ability to combat financial crime risks and safeguard their operations with confidence should consider the following principles:

• Prioritize high-quality data: The utmost importance lies in the quality of data firms collect about their customers. This data quality directly translates into the ability to determine PEP status swiftly and accurately.
• Supplement a standard PEP screening process: Augmenting the process with additional checks, such as adverse media screening, provides an extra layer of scrutiny, enhancing the overall risk assessment.
• Take a risk-based approach: Customizable search profiles should be used to apply different search settings to groups of customers based on a firm’s business model and risk appetite.
• Re-evaluate after changes in PEP status: Changes to PEP status can occur when the entity’s mandate expires, or they resign, and the entity is removed from the source website. To keep up with these changes, firms should ensure their screening solution utilises a real-time risk database managed by teams of global data experts who can review and edit problematic profiles.
• Ongoing monitoring: As PEP legislation evolves over time, businesses must proactively monitor regulatory trends to understand their implications and adapt their processes accordingly, ensuring ongoing adaptability and compliance.

Key Takeaways

As the FCA completes its review, compliance teams should be on the lookout for its updated guidance within the year. In the meantime, firms can consult existing guidance on a risk-based approach to PEPs, including:

• The Wolfsburg Group’s PEP guidance. https://db.wolfsberg-group.org/assets/3867d9cf-7c9b-41bc-9fad-6685bbabd52c/4. Wolfsberg-Guidance-on-PEPs-May-2017.pdf  
• The FCA’s 2017 PEP Guidance   https://www.fca.org.uk/publication/finalised-guidance/fg17-06.pdf  
• 2023 Financial Crime Guide. https://www.handbook.fca.org.uk/handbook/FCG.pdf   
• The Joint Money Laundering Steering Group’s 2023 financial sector guide. https://www.jmlsg.org.uk/wp-content/uploads/2023/06/JMLSG-Guidance-Part-I_June-2023-version.pdf