Legal development

Thought for the Week: FCA launches review of treatment of domestic politically exposed persons - what firms should be doing? 

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    Last week the Financial Conduct Authority launched its review of the treatment of domestic politically exposed persons (PEPs) by financial services firms.

    What triggered the review?

    The management of firms' relationships with domestic PEPs has been in the spotlight over the summer, notably in relation to Coutts' decision to exit accounts held by Nigel Farage. This has led to a rise in complaints from PEP customers, many of whom have adopted the strategy deployed by Mr Farage to challenge their treatment by firms, including the use of data subject access requests (DSARs) to obtain internal records relating to their accounts.

    The FCA's review will assess how firms treat domestic PEPs, including specifically how firms are meeting AML obligations and FCA guidance to conduct proportionate and risk-based due diligence on customers. The FCA has already requested information from firms on their policies and procedures for managing relationships with domestic PEPs. As part of the review, the FCA has also written to UK based PEPs (including MPs, peers and senior civil servants) seeking feedback on their experiences of dealing with FCA regulated firms.

    What should firms be doing?

    Against the backdrop of these recent developments and heightened scrutiny of treatment of PEPs by the regulator, firms should consider assessing their policies, risk management systems and procedures concerning domestic PEPs, and whether their current arrangements are aligned with the legislative framework and FCA guidance.

    Firms should also prepare themselves for an uptick in the number of DSARs from PEP customers, ensure that they are across their disclosure obligations, and are clear what data they are/are not required to hand over to customers upon receipt of a DSAR.

    The FCA has indicated that it will be assessing how firms are effectively communicating with their PEP customers, including when closing accounts. Firms should review record keeping procedures and ensure that reasons for the decision to exit customer relationships are carefully documented and communicated to the customer (noting that firms will need to exercise care to avoid the risk of "tipping-off" where the account closure is due to financial crime concerns). This issue alone is one that is likely to cause firms some difficulties given the FCA's wish for transparency in communications.

    Wider policy context

    The FCA review is the latest in a series of policy developments in recent months aimed at addressing the issue of de-banking customers:

    • The Financial Services and Markets Act 2023 (which was enacted on 29 June 2023) imposes a requirement on HM Treasury to amend The Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 such that where a customer is a domestic PEP the "starting point" is that the customer presents a lower level of risk than a non-domestic PEP. In the absence of enhanced risk factors, the extent of enhanced due diligence measures to be applied to that customer is less than the extent to be applied in the case of a non-domestic PEP;
    • In July, HM Treasury published its response to a Call for Evidence on the subject of contract termination and freedom of expression. The Government intends to make changes to existing regulations with the objective of (1) improving transparency for account users in receiving a clear understanding why their payment account contract has been terminated, and (2) requiring that payment account providers must provide at least 90 days’ notice when choosing to terminate a contract; and
    • In August, the FCA commenced an exercise to gather data from 25 lenders on bank account applications, new account openings, and account closures. The FCA will report its findings later this month.

    Authors: Lynn Dunne, Partner; Mark Donnelly, Junior Associate

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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