Four insights for UK firms in the year of the PEP
The recent review by the Financial Conduct Authority (FCA), along with updates to the UK’s anti-money laundering regulations, has resulted in new requirements for firms: they must now classify ‘domestic’ PEPs as inherently lower risk compared to ‘non-domestic’ PEPs as long as there are no ‘high-risk indicators’ present. With the recent election completed and new MPs in office, UK firms are now facing the challenge of adjusting to these changes in guidance.
As firms make operational adjustments in light of the UK’s regulatory update, the spotlight on PEPs presents an opportunity to reflect on four key insights.
- The end of the blanket approach
The FCA review came amid reports that some financial institutions (FIs) were restricting the access of PEPs and their associates to financial services, leading to poor customer relationships.
The FCA’s push to treat domestic PEPs as inherently lower-risk was a (perhaps slightly blunt) solution to the underlying problem: Many firms were not demonstrably taking a risk-based view. I’ve seen instances of firms applying a blanket approach to source of wealth (SOW) and source of funds (SOF) for every PEP customer. Instead, they should be asking themselves what risk political exposure actually presents to their business and the products that they offer, and optimising their controls to mitigate that risk accordingly.
- A dilemma for international banks
This takes on another dimension for international firms, including foreign banks with UK offices. While the natural goal of any organisation is to standardise their policies as much as possible, compliance teams in these institutions will now have to consider developing UK-specific approaches to PEPs. The FCA’s review registered its surprise, for example, that senior executives at sports organisations were classed as PEPs by some firms. This would itself come as a surprise to most European banks, who routinely define these figures as PEPs. Therefore, PEP screening attuned to local jurisdictional requirements is a must for banks going forward.
- Firms can’t take data for granted
In my experience, firms recognise good PEP screening is built on good data, but many still struggle to access accurate, up-to-date information. Former and even deceased PEPs who should have been declassified but are still showing up as PEPs in their screening solution are a typical example. This is particularly important now that firms look to declassify a PEP’s relatives and close associates (RCAs) as soon as they have left office.
The use of software in PEP screening is hugely helpful for firms, but only if the data they’re using is of a high quality. Firms need to make sure their screening solution can reflect changes in the PEP landscape as quickly as possible, providing context for updates to customers’ PEP status so that compliance teams can genuinely understand the risks associated with political exposure.
- Data divergence causes problems
How firms store customer information is equally important. It’s not unusual for larger firms to hold customer data across several different systems, and for there to be differences in how data is formatted within these systems.
Customer names are one example. This is just part of how large firms operate – but these differences can cause problems, and firms need to standardise their data. They have a choice of how – either by addressing the cause of data divergences at source or by layering a standardising solution over the top of their data – but either way, without the right data architecture, firms will struggle to make changes effectively.
Get actionable advice on how to navigate the PEP landscape in ComplyAdvantage’s guide, The Challenge of PEPs.
Article Credit: https://www.ukfinance.org.uk/news-and-insight/blog/four-insights-uk-firms-in-year-pep