Some would argue that the UK remains a world leading venue for money laundering, hence the regular flow of guidance, publications and consultations from the Treasury, various regulators and industry bodies to ‘help’ firms in the financial sector.
One area challenging firms is how to achieve a balance between the FCA’s objectives of fighting financial crime and avoiding poor consumer outcomes to comply with the "Consumer Duty". Is there a commercial or regulatory choice between de-risking a business (i.e. turning away potential clients) and addressing consumer outcomes? The FCA expects that firms will robust financial crime mitigation processes in place and that there are no "poor outcomes" for consumers as a result of the processes being "over-calibrated".
A concern I hear is what kind of evidence of money laundering would be needed following a "red flag" being raised? Most of the fines levied against financial services businesses have not been because money laundering has taken place but because systems and controls weren’t felt to be strong enough.
FCA expectations
In our sector, the FCA's expectations remain high and while some firms are making progress, reviews covering various areas indicate that there is still some way to go.
We think the following are areas of focus for both the FCA and the firms they regulate:
- Appropriate risk assessments – from the level of individual client or business relationship, through product or market specific controls up to a business-wide risk assessment. Is your firm’s approach robust?
- Senior management ownership – at all stages of the procedures, from policy creation to implementation, monitoring, and revision, based on adequate management information and clear reporting lines. How well documented is your firm’s approach?
- Ongoing review – in response to new products or services, new classes of customer, or from any compliance issues arising on the ground. How is this regular review perceived across the firm?
- Oversight of outsourced activities – the FCA expects firms to have powers in place to hold outsourced third parties and counterparties to account e.g. to request information and to require changes if needed.
Implementation issues
Given the large volume of material available it can be difficult for firms to ensure that they are focused on what is relevant to their business e.g. when to make adjustments that will materially assist in keeping up with FCA expectations.
Some examples of issues are the desire to reduce the risk of facilitating money laundering, for example by freezing accounts while still complying with the "Consumer Duty" to avoid "poor customer outcomes" (such as freezing accounts following false positives or keeping them frozen for too long, while investigations are carried out).
There are any number of firms offering new technologies to achieve more efficient compliance processes – with artificial intelligence (AI) becoming more prominent in these offerings. Getting the balance right between human intervention and technological assistance is not straightforward.
The author, Vince Harvey, has worked in financial services for many years and has been running his compliance consultancy for more than a decade. His specialist areas within the Compliance Alliance are investment advice and management.
You can contact him on 07890311875 or at vince@compliancecubed.co.uk