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The Financial Action Task Force (FATF) has announced a public consultation on proposed revisions to its anti-money laundering and counter-terrorism financing (AML/CTF) standards, with an emphasis on promoting financial inclusion.
This initiative aims to address the unintended consequences of AML/CTF measures, which can inadvertently exclude vulnerable populations from the financial system.
Interested parties are invited to submit comments to FATF by December 6, 2024, with feedback set to inform the final revisions.
FATF’s proposed changes target Recommendation 1 and its Interpretive Note, along with related adjustments to Recommendations 10 and 15. The revisions are designed to increase flexibility in applying risk-based approaches, while also allowing for proportionality and simplified measures.
What are the proposed changes?
In the consultation, FATF is looking at four changes in its approach:
- Non-face-to-face transactions: Acknowledging advances in digital identity systems, FATF proposes that non-face-to-face transactions no longer automatically be considered high-risk if effective risk mitigation measures are in place.
- Proportionality over commensurability: FATF suggests replacing “commensurate” with “proportionate” in Recommendation 1 to clarify expectations and align its terminology with financial inclusion frameworks. Stakeholders are invited to provide feedback on this terminology shift, as well as on a newly proposed definition for “proportionate”.
- Enhanced oversight by supervisors: FATF is considering requiring supervisors to review and understand the risk mitigation strategies of financial institutions. This is intended to prevent over-compliance resulting from a partial view of risks, while promoting proportionality in regulatory engagement.
- Encouragement of simplified measures: In lower-risk situations, FATF proposes that countries “allow and encourage” simplified measures, which would support financial inclusion by fostering an enabling environment for streamlined processes.
A win for payments and banking firms?
If these rules become final, this could be the starting point for a significant change in how payments and banking institutions are overseen, and, in particular, could make compliance protocols more flexible and efficient than they are currently.
For example, recognising that digital identity solutions have matured, FATF’s draft guidance suggests removing the assumption that non-face-to-face transactions are inherently high risk.
For digital-first payment and banking firms, this could lower compliance hurdles for handling remote onboarding, such as video verification or e-signatures, making it easier to onboard clients while mitigating risks through technology.
The new guidance could also deliver better relationships between the industry and its regulators.
The proposed requirement for supervisors to “review and take into account” firms’ risk mitigation strategies could foster a more collaborative, informed approach to regulation.
For payment and banking firms, especially those that want to innovate, this might translate to a regulatory environment that is more understanding of their specific risk management frameworks, potentially resulting in fewer incidents of regulatory overreach.
