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The Financial Conduct Authority (FCA) has opened a new review into the treatment of politically exposed persons (PEPs), amid growing concerns of unnecessary account closures by financial service providers.
As per the terms of the review, the FCA will look at how regulated firms are complying with anti-money laundering (AML) legislation and current guidance on the treatment of domestic PEPs.
First, the review will look at how firms are applying the definition of a PEP, and whether there is evidence of over-application of PEP status to customers.
The UK’s PEP regime is based on the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, also known as the MLRs.
The MLRs provide a broad but non-exhaustive list of PEPs, alongside which sits FCA guidance on application of PEP status domestically.
In the terms of the review, the FCA highlighted a line from its 2017 guidance, in which it advises firms that domestic PEP status should be accorded only to those who hold “truly prominent positions”.
“Firms should not apply the definition to local government, more junior members of the senior civil service or anyone other than the most senior military officials,” the FCA said.
Second, the review will look at how firms conduct “proportionate” and “risk-based” assessments of domestic PEPs, their family members and known close associates.
Based on these assessments, firms are required to conduct “enhanced due diligence” checks and ongoing monitoring of PEPs — both of which can result, and have recently resulted, in account closures or rejections.
According to the FCA, “some” firms are using standardised questionnaires for PEPs and their family members that may not “sufficiently recognise” the lower risks associated with domestic PEPs.
“There is a concern that firms may be failing to properly implement our guidance,” said the regulator. “This matters, as individuals may be excluded from products or services through no fault of their own.
“As well as potential unfairness, this also potentially harms the reputation of the UK's financial services sector.”
Thirdly, the FCA will look at whether firms are communicating “effectively” with PEP customers as required, and whether firms are reviewing their PEP controls internally to ensure they remain appropriate.
The FCA will publish the findings of the review by June 29, 2024, and if necessary it will also open a consultation on proposed revisions to its existing guidance.
During the review, the FCA said it will take “prompt action” if it identifies significant problems at any particular firm, and it will share with HM Treasury any findings that “may have bearing” on current legislation.
Why now?
As per Section 78 of the Financial Services and Markets Act (FSMA) 2023, the FCA is required to conduct a review of firms’ PEP controls based on the MLRs and the Consumer Duty.
After the FSMA came into effect on June 29 this year, the FCA was given three months from that date to publish the terms of the review and 12 months to report its findings.
Statutory requirements aside, the FCA also said the review is necessary due to concerns that firms are not “treating customers individually” with regard to PEP controls, leading to breaches of both legislation and FCA guidance.
Although no individual PEPs are mentioned by name in the FCA’s terms of the review, several have come forward in 2023 with claims of perceived mistreatment by financial service providers.
At the end of June, former UKIP leader Nigel Farage publicly disclosed that his Coutts bank account had been closed earlier this year.
Coutts initially told Farage that the decision to close his account was a “commercial” one, but an internal Coutts dossier, subsequently obtained by Farage’s lawyers, showed that his PEP status was also a factor.
Having resigned as leader of the Brexit Party and officially retired from politics in March 2021, Farage’s case re-ignited a lon-standing debate among AML professionals as to when to “declassify” a PEP.
According to Financial Action Task Force (FATF) Recommendation 12, certain individuals can be PEPs for life, providing they continue to hold a “prominent public function”.
“The language of Recommendation 12 is consistent with a possible open ended approach,” FATF notes in its guidance. “I.e. ‘once a PEP — could always remain a PEP’.”
As noted by the FCA, the UK’s MLRs are based on FATF Recommendations and, as such, firms are asked to apply a risk-based approach, rather than a term-limited approach, when declassifying PEPs.
Other PEPs come forward
Following Farage’s battle with Coutts, UK chancellor Jeremy Hunt also said that he had tried to open a Monzo bank account in 2022, and his application was rejected due to his PEP status.
Other PEPs have since provided more stories of perceived unfair treatment by financial service providers, involving either themselves or their family members.
Lord Sharkey, former advisor to Nick Clegg, said his three children were threatened with account closures by National Savings & Investments (NS&I) following “overzealous” source of funds requests.
Lord Forsyth, former Cabinet minister under John Major, said his daughter was asked to switch banks purely due to her father’s PEP status.
Baroness Kramer, a Liberal Democrat peer, also said she was unable to open a savings account with Chase UK due to her PEP status.
In Kramer’s case, Chase UK asked the Baroness to provide proof of income statements on behalf of her deceased husband, who died 17 years ago.
Application to payments firms
As covered by Vixio, allegations of unfair treatment by PEPs have already led HM Treasury to propose new regulations on bank and payment account closures.
In July, the Treasury revealed its plans to increase the notice period prior to an account closure from 30 days to at least 90 days.
Under the proposals, banks and payment service providers (PSPs) must also give a clear explanation for the account closure, and must “aid” the customer in their efforts to challenge the decision.
