FCA Calls for Improved Treatment of Politically Exposed Persons

On July 18, 2024, The Financial Conduct Authority (FCA) warned institutions in the financial services sector to effect a radical overhaul on how they handle politically exposed persons (PEPs).

It was found out most of the firms did not check on PEPs or refuse accounts based on their PEP status alone, but improvements in their handling are still required.

FCA now wants financial firms to take further action in the way they deal with politically exposed persons (PEPs).

But while most firms do not have over-the-top checks in place or refuse business purely on the basis of PEP status, the FCA thinks more can be done.

Institutions should sharpen up their definition of what a PEP is, update their status when they step down, enhance communications on policies and procedures, and ensure proportionate risk assessments.

All these suggested changes should walk a thin line between necessary vigilance and the need to treat PEPs fairly.

Suggested Practice for Treatment of Politically Exposed Persons

The FCA has laid down standardized practices for financial institutions to improve their treatment of Politically Exposed Persons (PEPs).

The institutions would also need to extend this characterization and treatment of PEP to RCA’s (Relative and Close Associates), which are no stricter than the legal requirements or definitions.

The FCA has been noticing that although plenty of companies are not very rigid and discriminatory, standardized and beefed-up practices are the need of time to ensure uniform risk management, and it suggests that the definitions of PEPs be better filtered out.

The status of the person having left office should be immediately updated, since the redundant or inconsistent status of a PEP shall not put any unnecessary restrictions or loss of business on an organization.

FCA also laid emphasis on clear communication to PEPs regarding reasons for the measures taken. It further urged firms to undertake proportional risk assessment based on real time risks posed by individual PEP and increase staff training to get the right implementation of policies relating to PEPs.

“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.”

Rightfully said by Sarah Pritchard, the FCA’s executive director of markets and international.

Why Is Refined PEP Screening Crucial?

The FCA of the UK has advised its financial institutions to work towards refining their treatments with respect to PEPs so that the management of risks related to money laundering and corruption is done in a fair and proportional way.

It identified some areas for improvement in the issued guidance—updating and clarification of PEP definitions, ensuring that the status of PEPs who have left office is updated promptly, and improvement in communication of PEP policies.

It also called on firms to undertake risk assessments that were commensurate with the actual risks posed by individual PEPs, so as to avoid overly prescriptive and unjustifiable denial of service.

More importantly, the FCA had underscored that enhanced staff training be conducted to ensure proper implementation of the PEP-related policies and to reduce errors.

These are some steps that try to bring in a mixed balance of strong security with fairness to avoid unnecessary barriers to the public servant and his family.