UK banks, payment firms and lenders are “getting the balance wrong” in how they treat politicians and senior public servants, UK financial regulator the FCA has said.

The FCA drew its conclusion after conducting a review of how politically exposed persons (PEPs) are treated. The review was carried out at parliament’s request under Section 78 of The Financial Services and Markets Act 2023 after a growing number of complaints over ‘debanking’.

Global standards

Financial firms are required to carry out extra checks on people classed as PEPs, with global standards set by the international Financial Action Task Force and adhered to in more than 200 jurisdictions. The FCA’s review looked at how UK firms were meeting those requirements.

Responses were received from 65 PEPs, and data gathered from firms in five retail sectors before 15 individual firms were selected for more detailed review, including the firms most often referred to in PEPs’ responses.

The FCA found that most firms “did not subject PEPs to excessive or disproportionate checks and none would deny them an account based on their status.” However, it said: “All firms could improve” and set out a list of measures it wants to see taken.

• Ensure the definition of a PEP, family member or close associate is tightened to the minimum required by law and does not go beyond that.
• Review the status of PEPs and their associates promptly once they leave public office.
• Communicate to PEPs effectively and in line with the Consumer Duty, explaining the reasons for actions where possible.
• Effectively consider the actual level of risk posed by the customer, and ensure that information requests are proportionate to those risks.
• Improve the training offered to staff who deal with PEPs.

Public service

Sarah Pritchard, the FCA’s executive director of markets and international, said: ‘Public service naturally comes with greater scrutiny. But it must be proportionate and shouldn’t disadvantage people running for office or taking senior public roles, or their families. That requires a balancing act.

“Most firms try to get it right but there is more they can do. We’re following up with those firms that were getting the balance wrong to ensure they make changes.”

In January, changes to due diligence requirements on domestic PEPs came into force under the Money Laundering and Terrorist Financing (Amendment) Regulations 2023. They specified that UK PEPs must be treated as “inherently lower-risk” than those from overseas.

Legal starting point

FCA guidance now says that the way firms act should reflect that new legal starting point, make clear that non-executive board members of civil service departments should not be treated as PEPS solely for that reason, and be more flexible in who signs off PEP relationships.

• “All the firms we assessed needed to make improvements,” the FCA said, identifying the following issues.
• Using definitions for PEPs and RCAs that are wider than those in the regulations and FCA Guidance.
• Absence of effective arrangements to assess if the PEP classification was still appropriate after the PEP had left public office.
• Failure to consider the customer’s actual risk in their assessment and rating, and failing to give a clear rationale for the risk rating.
• Lack of clarity and detail in communications with PEP and RCA customers.

The FCA also said most firms needed to improve their staff training, and some firms needed to update their policies to reflect recent legislative amendments.

“Based on our findings,” said the FCA, “we expect all firms to check that their policies, procedures and controls are in line with our Guidance.” And it added, “where improvements have been identified, firms should implement those changes now and not wait for the final updated guidance to be published.”

Consultation on the guidance remains open until October 18, 2024.