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The Financial Conduct Authority - focus on the prevention of financial crime

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01 October 2013

The Financial Conduct Authority (FCA) has recently emphasised the importance of its responsibilities in relation to the prevention of financial crime within those sectors of the UK financial services industry that it regulates. The term “financial crime” encompasses a broad range of areas that are relevant for UK and international financial institutions, including: data security, money laundering, terrorist financing, bribery and corruption, fraud and sanctions breaches.

The FCA’s responsibilities relating to the prevention of financial crime

The FCA does not have a freestanding statutory objective to reduce financial crime. However, reducing the extent to which FCA-regulated firms can be used for financial crime is a priority for the FCA as part of its wider objective to enhance the integrity of the UK financial system. The FCA also has specific responsibilities under the Money Laundering Regulations 2007 (MLR) to ensure that firms it regulates comply with the MLR.

Emerging themes

In some of its recent publications, the FCA has observed the following as emerging themes in relation to the prevention of financial crime within a number of UK financial institutions:

  • A lack of appropriate financial crime systems and controls in place for higher-risk clients.
  • Firms failing to manage situations where, in the FCA’s view, relationship managers appear to be too close to their clients. The FCA found that in such situations, the objectivity of a relationship manager when assessing the financial crime risk posed by their client may be compromised.
  • Inadequate attention being paid to potential financial crime “red flags” in trade finance transactions as well as a lack of appropriate policies and procedures for such transactions.

The FCA has also stated that it has found the root cause of these issues to often be more general failings in firms’ governance arrangements in relation to the prevention of financial crime.

Ways in which the FCA discharges its responsibilities

All firms regulated by the FCA are required to take steps to reduce the risk of financial crime. The FCA has stated that its responsibilities in relation to the prevention of financial crime inform “all aspects of [its] work” ranging from authorisations, day-to-day supervision of regulated firms and enforcement activities. The FCA has made it clear it will use supervisory, intervention and enforcement powers to seek to improve firms’ behaviour around financial crime risk.

The FCA confirms its approach to publishing information about enforcement warning notices

The FCA has confirmed how it will exercise its new power to publish information about warning notices it issues in enforcement cases from 15 October 2013.

The FCA’s new power allows it to publish details about its enforcement cases at a much earlier stage than was previously permitted and notably before a firm or an individual under investigation has had an opportunity to formally challenge the FCA’s case against them.

This means that it will be more important for the subject of an FCA investigation and their advisers to engage with the FCA as to the merits of their case at an earlier stage, instead of waiting until the FCA issues a warning notice. Doing so may help to ensure that representations made to the FCA before the warning notice stage are taken into account in the information published about the warning notice.

When will the FCA publish information about warning notices?

The FCA will start from the presumption that it will normally be appropriate to publish on its website a summary of the allegations made against a firm or an individual in an enforcement warning notice.

If the subject of the warning notice is: (a) A firm: It is likely that the FCA will identify that firm in the information it publishes. (b) An individual: The FCA will only identify that individual in exceptional circumstances, for example, if the individual is a member of senior management or it is necessary to do so in order to prevent or dispel market rumours as to the identity of the subject of the warning notice. Even if the FCA decides not to publish the identity of an individual who is the subject of a warning notice, it may still publish the identity of the firm that they are employed by even if that firm is not the subject of an FCA enforcement investigation.

In the event that the FCA thinks that it is appropriate to publish information relating to a warning notice, the subject of the warning notice and any parties it is copied to will be notified and given 14 days to make representations. It is likely that such representations will focus on whether it is fair or appropriate for the FCA to publish such information.

What information will the FCA publish?

The FCA does not have the power to publish warning notices in their entirety. Rather the FCA is intending to publish a summary of the misconduct and breaches alleged in the warning notice, the identity of the subject (if appropriate) and a note which clarifies that a warning notice does not represent a final decision of the FCA.

If a case about which information has been published at the warning notice stage is subsequently discontinued, the FCA has stated that it will not remove this information from its website. Instead, the FCA will take steps to make it clear that the action has been discontinued but will not give reasons for the discontinuance.