UK regulator launches review of treatment of PEPs in light of recent “debanking” cases

FCA to review the treatment of domestic PEPs by financial services firms.

The FCA has today set out issues it will consider as part of a review of the treatment of domestic Politically Exposed Persons (PEPs) by financial services firms. This review is being conducted in compliance with S78 of the Financial Services and Markets Act 2023. The regulator will examine how firms are adhering to the anti-money-laundering legislation and FCA guidance to conduct proportionate and risk-based due diligence on their clients.

The FCA’s review will look carefully at firms’ arrangements for dealing with PEPs based in the UK. While the FCA cannot change the law putting in place the PEPs regime, the review will consider how firms are:

  • applying the definition of PEPs to individuals;
  • conducting proportionate risk assessments of UK PEPs, their family members and known close associates;
  • applying enhanced due diligence and ongoing monitoring proportionately and in line with risk;
  • deciding to reject or close accounts for PEPs, their family members and known close associates;
  • effectively communicating with their PEP customers;
  • keeping their PEP controls under review to ensure they remain appropriate.

The review will report by the end of June 2024. The FCA will take prompt action if any significant deficiencies are identified in the arrangements of any firm assessed. 

Sarah Pritchard, Executive Director of Markets at the FCA, said: “These rules follow international standards and are designed to keep the financial system clean, free from corruption and guard against financial crime. It’s important that they are implemented proportionately and don’t create unnecessary barriers for public servants and their families. We have already persuaded some firms to improve their approach and we will use this review to identify if we need to provide further guidance to firms.”

PEPs regime

Under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (MLRs), adopted by Parliament, financial firms are required by law to undertake extra checks on political figures, their families and known close associates. This derives from the international standards issued by the Financial Action Taskforce.

They are necessary due to the possibility that a PEP may be in a position to abuse their public office for private gain and to use the financial system to launder the proceeds of this. The MLRs require firms to apply extra measures, known as enhanced due diligence (EDD), to PEPs. This includes information about their source of wealth. EDD must also be applied to any family members or close associates of PEPs.

The FCA published guidance for financial services firms in 2017 to help them apply a proportionate and risk-based approach to PEPs. Firms will need to explain how appropriately they are implementing their AML controls under the MLRs, and how these meet the FCA’s Consumer Duty which came into force on July 31, 2023. If rules are applied inappropriately by firms, then individuals may find themselves excluded from products or services through no fault of their own.

The FCA has already taken a number of steps to remind the industry and specific firms that they should follow its guidance on implementing current rules, and some firms have already changed their approach as a result.

Individuals can also raise concerns with their financial institution or the Financial Ombudsman Service.