Covering the exposed: The effects of the FCA’s PEP review on financial compliance
With the Financial Conduct Authority (FCA) set to publish its highly anticipated review of the treatment of politically exposed persons (PEPs) this month, financial services must get their houses in order to ensure compliance with the new guidelines.
The FCA is set to publish its review of the treatment of PEPs this month
The review, mandated by Section 78 of the Financial Services and Markets Act 2023, aims to evaluate how regulated firms apply enhanced due diligence to domestic politically exposed people. A PEP is someone who is in public office and is, therefore, at higher risk for potential involvement in bribery or corruption due to the nature of their position. PEPs include MPs, ministers, members of the Supreme Court and their family members, among others. Accounts owned by PEPs require banks to apply enhanced due diligence measures.
This month’s review comes at a critical juncture as financial institutions grapple with the challenge of balancing rigorous risk management practices with the need to provide equitable access to financial services.
The Farage factor
Last year’s controversy surrounding Nigel Farage’s allegations of account closure due to his political stance catapulted this issue into the spotlight. While Farage’s case was high profile, it underscores a broader challenge – ensuring that PEP status does not automatically trigger disproportionate measures.
This scenario is not uncommon in the world of private banking. Ideally, when high-profile political figures start dominating news cycles, banks would have already completed the necessary procedures to ensure compliance with PEP protocols. However, even prominent financial institutions often find themselves scrambling to review due diligence processes when a high-profile political client makes headlines. Compliance teams find themselves with little time to initiate a comprehensive review of all know your customer (KYC) documentation, onboarding processes and ongoing due diligence measures associated with the person’s account.
Particularly with the recent change in government, where new prominent figures are coming to the fore, constant vigilance from financial services is required in managing the politically exposed persons on their books and enacting the correct procedures. There is a delicate balance between maintaining stringent compliance standards and avoiding undue prejudice against individuals solely based on their political status.
A balancing act
The FCA’s emphasis that PEP status alone should not be grounds for account closure or service denial presents both a challenge and an opportunity. Institutions must mitigate financial crime risks while ensuring fair access to services.
However, striking this balance is often easier said than done. The reality of managing PEP accounts can be complex and fraught with oversights. Institutions can fail to promptly identify when an existing client ascends to a prominent political position and effectively is classified as a PEP.
Oversights can be undiscovered for months until routine audits expose the critical gap. Such incidents underscore the challenges financial institutions face in maintaining up-to-date risk profiles for their clients. While the focus is often on high-profile cases or new clients, financial institutions must see the equal importance of a robust and dynamic review processes for existing clientele.
Implications for financial institutions
The FCA’s review signals a potential paradigm shift in PEP management. Banks and other financial entities must prepare to demonstrate a more nuanced, risk-based approach, particularly for domestic PEPs traditionally considered lower risk.
Compliance teams should anticipate the need for more granular risk assessment models, enhanced audit trails for decision-making processes, improved communication protocols with PEP customers, robust data integration capabilities and advanced reporting functionalities to evidence compliance.
As regulatory expectations evolve, so too must the technological infrastructure supporting compliance efforts. Financial institutions will likely need to reassess their current systems, potentially seeking more sophisticated solutions that can meet the challenges of a constantly shifting political exposure landscape. Technology solutions exist so compliance firms can be vigilant and proactive in monitoring for changes beyond periodic checks or reactions to headline-grabbing events.
Looking ahead
As the industry awaits the review’s findings, proactive preparation is key. Financial institutions should conduct internal audits of current PEP-related processes and invest in staff training to ensure understanding of proportionate risk-based approaches.
Compliance technology should be reviewed and potentially upgraded where needed too, giving teams the capacity to effectively engage with regulators and industry bodies to stay abreast of new developments.
The upcoming review represents more than just a regulatory exercise – it is an opportunity for the UK financial sector to lead in developing best practices for PEP management. By embracing sophisticated, technology-driven solutions and adopting truly risk-based approaches, institutions can not only meet regulatory expectations but also enhance their reputation for fairness and integrity.
