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FCA: effective anti-money laundering strategies should not include 'wholesale derisking'

Banks that exclude entire categories of customer from their services because they are perceived as more likely to be involved in financial crime risk regulators questioning the effectiveness of their compliance procedures, the Financial Conduct Authority (FCA) has warned.28 Apr 2015

The regulator said that money transfer services, charities and fintech companies had found it difficult to access financial services because they were seen as being higher risk, while some banks were also pulling out of the 'correspondent banking' market, which is associated with foreign exchange and international payment services. The FCA said that banks should use "judgement and common sense" to ensure that their anti-money laundering (AML) compliance procedures did not create consumer protection or competition issues.

The FCA published its statement on firms' 'derisking strategies' alongside changes to its guidance on financial crime systems and controls more generally, following on from a consultation issued in November. It has updated the guidance to clarify its expectations in some areas where firms have been struggling with the requirements (18-page / 148KB PDF), including examples of good practice.

Financial regulation expert Michael Ruck said that the FCA's comments on derisking could be seen as "a thinly-veiled threat of enforcement action for those banks that do not offer and provide bank accounts" to customers with riskier business models.

"Although the FCA accepts in its statement that the decision is ultimately a commercial one for each bank, the FCA has made it clear that banks should be able to apply AML systems and controls across the whole of each bank's activities and that any inability to do so will raise questions at the regulator about each bank's ability to operate in compliance with regulatory requirements generally," he said.

FCA regulations prevent firms from entering into business relationships if the firm "does not believe that it can manage the money-laundering risk associated with [that] business relationship effectively". However, the FCA said that this did not mean that banks should deal "generically with whole categories of customers".

"We expect banks to recognise that the risk associated with different individual business relationships within a single broad category varies, and to manage that risk appropriately," the FCA said in its statement.

"While the decision to accept or maintain a business relationship is ultimately a commercial one for the bank, we think that there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements. As a result, we now consider during our AML work whether firms' derisking strategies give rise to consumer protection and/or competition issues," it said.

The FCA included the importance of firms' financial crime prevention systems and controls as one of its top seven 'areas of focus' over the coming year as part of its business plan for 2015/16. In November 2014, it reported that it had found weaknesses in insurance brokers' bribery and corruption prevention systems and controls, and in the anti-money laundering controls operated by small banks. These findings prompted the review of its existing financial crime guidance.

The UK Treasury has also proposed extending AML compliance requirements to digital currency trading platforms, in a way that would both "support innovation and prevent criminal use". The government is to formally consult on its proposed regulatory approach early in the next parliament.

Ruck said that the updated guidance "amplified" the FCA's ongoing message to firms that compliance with AML, anti-bribery and corruption, financial sanctions and other regulatory requirements was "at the top of the FCA's current agenda".

"The FCA's recent Business Plan and recent public statements serve only to echo this," he said.

"Whilst the EU's fourth Money Laundering Directive is not yet in force or implemented in the UK its shadow is seen within the current draft of the FCA's Financial Crime Guide and its spirit will no doubt be implemented by the FCA in both its supervisory activities and its enforcement investigations," he said.

Insurance law expert Colin Read of Pinsent Masons said that the examples of good practice included in the amended guidance would be particularly helpful to those smaller insurance brokers with limited experience in complying with regulatory requirements.

"However, the FCA is clear that these examples are not binding and, in the FCA's words, firms can 'meet their legal and regulatory obligations in other ways'," he said.

The FCA's updated guidance places particular importance on the role of management information (MI), provided to a firm's senior management by auditors, compliance officers and customer-facing staff, in helping management understand the financial crime risks to which their firm is exposed. It provides a non-exhaustive list of potentially useful MI, including staff expenses claims, gifts and hospitality, the number and nature of suspicious transaction reports and information about individual business relationships.

"Often, MI within a business can be limited to performance in pure profit and loss (P&L) terms," said Read. "The guidance on MI provided by the FCA makes plain the need to have a clear audit trail of a range of broader MI indicators to ensure financial crime systems and controls are effective."

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