FCA launches review into how firms are handling Politically Exposed Persons

The FCA has launched a review of the treatment of domestic Politically Exposed Persons (PEPs) by financial services firms.

Under legislation adopted by Parliament, financial firms are required to do extra checks on political figures, their families and close associates. More than 200 countries and jurisdictions have signed up to the standards set by the Financial Action Task Force.

However, if rules are applied inappropriately by firms, then individuals may find themselves excluded from products or services through no fault of their own.

While the FCA cannot change the law putting in place the PEPs regime, the review will consider how firms are applying the definition of PEPs to individuals and how they are conducting proportionate risk assessments of UK PEPs, their family members and known close associates.

The review will also examine how firms are applying enhanced due diligence and ongoing monitoring in line with risk, and how they keep their PEP controls under review to ensure they remain appropriate.

The review also aims to look into how and why firms decide to reject or close accounts for PEPs and whether they are effectively communicating with their PEP customers.

The review will report by the end of June 2024 and the regulator says it will "take prompt action if any significant deficiencies are identified in the arrangements of any firm assessed".

Sarah Pritchard, executive director of markets at the FCA, said: "These rules follow international standards and are designed to keep the financial system clean, free from corruption and guard against financial crime.

"It’s important that they are implemented proportionately and don’t create unnecessary barriers for public servants and their families. We have already persuaded some firms to improve their approach and we will use this review to identify if we need to provide further guidance to firms."

Rhys Novak, partner at City law firm Charles Russell Speechlys, commented: “When dealing with regulatory risk, extremes are, in theory, relatively straightforward to address.

"The challenge lies in determining the boundary in each specific case. It’s entirely possible for a marginal case to fall one side of the line at one firm but fall on the other at a different firm. The critical factor is whether the decision is objectively defensible based on sound reasoning, whether it disregards irrelevant factors, and whether it has undergone appropriate scrutiny and documentation.

"The starting point is also crucial. Has the firm initiated the analysis using the correct set of questions? It’s worth noting that UK PEPs, unless there are specific aggravating factors, typically fall into the “lower risk” category.”