The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

This blog is co-written by Simon Ward, Rajni Johnson and Heather Curtis, KPMG UK.

The treatment of Politically Exposed Persons (“PEPs”) under the UK’s anti-money laundering regime has been in the spotlight over the past year. Recent changes to legislation and upcoming revised FCA Guidance means firms should be actively considering the effectiveness of their own frameworks for managing the risks associated with this category of customer.

How did we get here?

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended) (‘the MLRs’) require the application of enhanced due diligence (EDD) measures to PEPs and their Relatives and Close Associates (RCAs). However, in an effort to mitigate the burden for PEPs with a lower risk profile, the FCA’s 2017 guidance specified that PEPs “entrusted with a prominent public function in the UK should be treated as low risk, unless a firm has assessed that other risk factors not linked to their position as a PEP mean they pose a higher risk.”

Last year, the parliament took steps to codify the FCA’s guidance – amending the MLRs to state that the ‘starting point’ for any assessment of the risk associated with a domestic PEP is that they are lower risk than a non-domestic PEP.

Separately, the FCA conducted a multi-firm review of practices relating to domestic PEPs. The review found room for improvement and reiterated the need for firms to treat PEPs fairly and in line with their Consumer Duty obligations. The FCA has also consulted on related updates to its 2017 guidance.

What can regulated firms do?

The results of the FCA’s multi-firm review and recent experience provides some insights. The fundamentals of the UK’s PEP regime, as set out in the 2017 guidance, largely remain unchanged and the requirements in the MLRs must also still be observed. However, firms can act now to address any shortcomings and improve customer outcomes. This includes:

• Reviewing policy definitions for PEPs and RCAs and ensuring they are targeted and in line with the (revised) MLRs and FCA guidance. Establish a reasonable mechanism for declassifying a PEP once they have left office and make use of it. Global firms should take particular care to ensure their policies consider the nuances of the UK’s recently amended regulatory regime.
• Re-assessing the risk ratings of existing customer relationships which involve a UK domestic PEP. At a minimum, review the drivers of risk ratings for high-risk domestic PEP relationships to confirm the presence of risk factors other than simply the PEP status. Ensure any findings are fed back into the risk assessment process and prevent the over-classification of PEP relationships.
• Establishing clear procedures and practical guidance on the extent of due diligence to be applied to UK domestic PEPs. Domestic PEPs must still be subject to EDD (including appropriate senior management approvals). However, where there are no additional risk factors other than an individual’s status as a UK PEP / RCA, EDD should be less intrusive than those in place for higher risk PEPs. For example, reviews of a domestic PEP’s source of funds and source of wealth should be tailored to the risks and leverage publicly available information.
• Ensuring ongoing monitoring is in place which keeps PEP/RCA information up to date (helping to identify declassifications) and provides effective MI to senior managers exercising oversight over the programme.
• Providing appropriate training for staff on the treatment of PEPs under the regime.

What happens next?

The FCA will publish updated guidance in due course. While the revisions are likely to be modest, the FCA’s recent move to act against non-compliant firms indicates regulatory scrutiny will continue. Firms should be proactive in identifying and rectifying gaps in their PEP management framework.