FCA Consults On Changes To Its PEP Guidance

On 18 July 2024 the FCA published Guidance Consultation GC24/4 ‘Proposed amendments to FG17/6 – Guidance on the treatment of politically exposed persons (PEPs)’. Hand-in-hand with its release of GC24-4, the FCA also published its multi-firm review on how effectively firms are following current guidance on the treatment of PEPs for anti-money laundering purposes. For a discussion of that review please see our note here.

The Guidance Consultation proposes the following changes:

1. Reflect the new legal starting point that UK PEPs should be treated as lower risk, unless other risk factors mean they pose a higher risk.
   The FCA clarifies that the definition of a PEP does not include:

• Local government in the UK;
• Other members of the judiciary (except judges of the Supreme Court); and
• Members of the administrative, management or supervisory bodies of state-owned companies, unless considered profit enterprises where the state has ownership of greater than 50% or where information reasonably available points to the state having control over the activities of such enterprises
  unless higher risks have been assessed, in which case enhanced due diligence (EDD) measures should be carried out.
  The Money Laundering Regulations (the Regulations) exclude more mid-ranking or junior individuals. However, the FCA makes clear it expects firms to understand the nature of the position held and be alert to the fact mid-ranking and more junior officials could act on behalf of a PEP when assessing the risk a customer may pose.

2. Make clear that non-executive board members of civil service departments should not be treated as PEPs solely for that reason. This is unless the non-executive board member already meets the definition of a PEP in respect of another capacity (e.g. member of the House of Lords).
3. Give greater flexibility in who can approve or sign off PEP relationships within firms. Firms should have a proportionate and a risk-based approach to the governance and sign-off process when establishing and maintaining PEP relationships. The Regulations make clear that PEP relationships should be signed off by senior management. The Guidance clarifies that such senior management should be (at a minimum), a person or panel of persons who hold equivalent seniority (or higher) as the person holding the MLRO senior management function (i.e. the SMF17).

In lower risk situations it may be appropriate to have an individual less senior than a board director sign-off on the PEP relationship. Conversely, in higher risk situations it would appropriate to have a more senior level of management (i.e. at board of director level) sign-off. In any case, the FCA stresses that they expect the SMF17 to be aware of any PEPs onboarded or rejected as part of their role of overseeing the operation of the firm’s AML policies and procedures.

The Guidance also seeks to provide firms with greater clarity on some of the indicators they should take into consideration when determining the risk posed by PEPs and/or their. This includes characteristics relating to product and geographical risks as well as personal and professional characteristics of the PEP and/or close associate.

The FCA is also proposing guidance on the types of measures firms could take in lower and higher risk situations. For example, in lower risk situations the FCA states firms could take less intrusive steps to establish source of funds and source of wealth by, for example, only using information already available to the firm, such as transaction history or publicly available information. Conversely, in higher risk situations, the FCA would expect firms to take more intrusive and exhaustive steps to establish source of funds and source of wealth.

Finally, the FCA expects firms to have robust processes in place to ensure any decisions made, whether these decisions relate to the approval or rejection of a PEP or close associate or the risk rating assigned to such a customer should be well-documented and signed off by an appropriate level of senior management.

Whilst this is a Guidance Consultation and may be subject to variation after the consultation period closes on 18 October 2024, our expectation is that most if not all of the proposed amendments will come into effect.

Therefore, firms should review their PEP processes and procedures in light of this Guidance Consultation and the findings and concerns raised by the FCA in its multi-firm review to identify any gaps. Once the gapping exercise is completed, firms should work diligently to ensure they have robust and proportionate risk-based arrangements in place which meet the FCA’s expectations.

For further guidance or to discuss how these changes affect your firm, please contact Dan Harasemchuk at rdh@objectivus.com or Bhavisha Patel at bp@objectivus.com or call Objectivus at +44 (0)2034 573 283