Summary: Speaking at the FCA Financial Crime Conference on 10 November 2016, Rob Gruppetta, head of the regulator’s Financial Crime Department, discussed the FCA’s financial crime agenda. Mr Gruppetta voiced concern about the compliance burden associated with the current AML regime and mooted changes to the rules. He also gave an overview of the FCA’s upcoming financial crime initiatives, including a plan for random sampling of firms.
Prospective reforms to AML regulation
The FCA is concerned that the compliance burden for firms under the present AML regime often outweighs the benefits to law enforcement. With that in mind, the FCA has raised with Government several possible reforms to AML regulation, intended to help cut costs for firms:
- Centralising transaction monitoring: The FCA thinks that centralisation led by industry or the public sector could achieve economies of scale, reduce duplication, and help firms and law enforcement to see the bigger picture in deciding what is – and what is not – suspicious.
- Abolishing criminal liability for MLROs: MLROs currently face potential criminal liability if they breach the suspicious activity reporting (“SAR”) provisions of the Proceeds of Crime Act 2002. Mr Gruppetta questioned if this criminal liability is doing more harm than good, leading to overly conservative or defensive reporting by MLROs, thus undermining the quality and utility of SARs.
- Relaxing CDD reliance provisions: The Money Laundering Regulations 2007 (“MLRs”) prescribe a process where firms can rely on another regulated person to conduct customer due diligence. But the strictness of the current provisions means that firms are reluctant to share information. Mr Gruppetta proposed a limited relaxation of the rules, acknowledging this would require international standards to be renegotiated.
The FCA will soon begin inspecting a random sample of firms it supervises under the MLRs. This will include businesses like financial advisors, stockbrokers, safe deposit box providers and life insurers. The FCA will review about 100 of these firms each year.
This new initiative will bring smaller firms within the regulator’s sight-lines. It will test the FCA’s perception that bigger businesses to some extent police smaller firms’ efforts to tackle financial crime.
The randomly-sampled inspections will take place alongside the other strands of the FCA’s specialist financial crime supervision: its case-driven work, thematic reviews, proactive inspections of smaller higher risk firms, as well as the Systematic Anti-Money Laundering Programme (“SAMLP”) involving 14 of the largest and most important retail and investment banks.
As to SAMLP, Mr Gruppetta noted that the FCA was nearing the end of its first SAMLP cycle and had seen most of the 14 institutions subject to the review. The regulator has found the programme to be an invaluable way to gain a better understanding of how the biggest, most complex firms manage financial crime risk. They have also learned how UK-headquartered firms seek to apply UK standards across their global platforms. However, serious deficiencies have also been identified, particularly in terms of weaknesses in governance; under-investment in financial crime resources; and inadequate controls. These failings are most significant in the context of higher risk business, and the FCA noted that it has required firms to make substantial changes and improvements.
Financial crime data returns
The FCA has introduced a new financial crime data return that all but the smallest firms will need to complete from the end of this year. The new returns are designed to help the FCA identify which firms are exposed to higher financial crime risk, aiding the regulator’s application of its “risk-based approach” to AML supervision.
Mr Gruppetta noted the apparent contradiction between imposing a new reporting requirement and his message that the FCA wants to reduce compliance costs. He stressed that the FCA plans to publish aggregated data from the new return, which it thinks will benefit firms.
The FCA is planning to update its Financial Crime Guide next year to take account of new UK regulations implementing the Fourth Money Laundering Directive. Among other things, the new guidance will cover how to distinguish between higher-risk and lower-risk politically exposed persons. But following criticisms of the volume of the existing guidance, Mr Gruppetta promised there would not be reams of new material. As usual, the FCA will consult on the new guidance before it is finalised.