The Financial Conduct Authority (FCA) has issued a stark warning to the chief executive officers of Annex 1 firms, underlining significant lapses identified in recent assessments regarding compliance with money laundering regulations. Annex 1 firms, which encompass certain lenders, safe custody providers, money brokers, and financial leasing companies, are mandated to be registered and monitored by the FCA in accordance with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).
With an estimated 1,000 Annex 1 registered firms, these entities are not authorised or subjected to the broader regulatory oversight of the FCA. However, the importance of stringent financial crime controls within these organisations cannot be understated.
Persistent Shortcomings in Financial Crime Controls As Financial Conduct Authority Act
The FCA’s initial findings from a data-led review of a sample of Annex 1 firms reveal a concerning pattern of fundamental inadequacies. Issues identified include discrepancies between registered activities and actual operations, financial crime controls lagging behind business growth, improper risk assessment of the firm’s or customers’ activities, and insufficient resourcing and oversight regarding financial crime issues.
In light of these findings, the FCA has advised all Annex 1 firms to critically evaluate their financial crime controls against the observed common weaknesses within the next six months. Firms are urged to promptly address any identified gaps to meet the regulator’s expectations.
Regulatory Consequences for Non-Compliance
The FCA has cautioned that firms failing to take appropriate measures in response to their recommendations may face regulatory repercussions, including the potential for enforcement action. This move underscores the regulator’s commitment to upholding the integrity of the UK’s financial markets through rigorous compliance enforcement.
Emad Aladhal, Director of a specialised team at the FCA dedicated to combating financial crime and fraud, emphasised the critical role of robust financial crime controls. “Poor financial crime controls not only facilitate criminal activities but also undermine the integrity of UK markets,” Aladhal stated. Despite overall progress among regulated entities, Annex 1 firms exhibit concerning lapses that must be promptly addressed.
Ongoing Efforts and Collaborative Approach to Combat Financial Crime
The FCA’s mid-term update on its three-year strategy to fight financial crime reveals positive advancements. The regulator is committed to sharing insights on both effective practices and areas of concern, aiding firms in aligning their operations with regulatory expectations. The battle against financial crime requires concerted efforts from both the public and private sectors, and the FCA reaffirms its dedication to contributing significantly towards this collective endeavour.
Regulation Authorities Determined to Advice and Support While Ensuring Regulations are Met
The FCA have acted swiftly to remind senior figures within businesses about the importance of compliance and ensuring their AML protocols are effective and fall in line within the regulatory framework. The FCA are there to ensure those regulations are met but they also want to advise and offer support to ensure businesses are complying before taking more decisive action. This highlights the ongoing efforts of regulation authorities to clamp down on compliance failings but also educate businesses so they understand the importance of complying within the regulations in place.
The FCA are not the only regulation authority to warn businesses they oversee, The Solicitors Regulation Authority (SRA) recently announced they have written to over 1,000 law firms about the importance of sanctions compliance. The SRA have offered guidance and education to unsure law firms following a survey they conducted in 2023 which showed over 1,700 firms from the 3,000 surveyed lacked essential controls to manage the risks of sanctions.
The regulation authorities have demonstrated a clear intention to help businesses before taking more severe action. Its critical businesses with the finance and legal sector have effective AML and compliance measures in place to ensure they are not put a risk of punishments.
