UK Regulator Reviews Politically Exposed Persons Regime

Tom Burroughes Group Editor London 6 September 2023

UK Regulator Reviews Politically Exposed Persons Regime

Recent controversies about banks' and financial services firms' "de-banking" a former political leader, and problems encountered by others, have prompted an outcry and demand for reform.

The UK’s Financial Conduct Authority is reviewing how banks and other firms apply rules for politically exposed persons (PEPs) – prompted by the storm of controversy caused by Coutts recently de-banking Nigel Farage, and other episodes.

The FCA said that although it can’t change laws on PEPs, its review – due to be complete by the end of June 2024 – will consider how firms apply the definition of PEPs to individuals; conduct “proportionate risk assessments of UK PEPs, their family members and known close associates”; apply enhanced due diligence and monitoring “proportionately” and in line with risk; effectively communicate with PEP clients; and keep PEP controls under review.

The PEP system, introduced in a number of countries to foil money laundering, corruption and other offences, has expanded in the UK and elsewhere as threats have multiplied. At the same time, sanctions imposed on Russia and other nations – and heavy fines on banks for lax controls – have encouraged lenders to take a tight approach. The Farage/Coutts case, while not necessarily directly about the former UKIP leader’s political status, raised concerns that the PEP system was getting out of hand. Other figures, such as the son of former UK Chancellor of the Exchequer, Nigel Lawson, have struggled to open accounts for relatives. Even the current Chancellor Jeremy Hunt reportedly had a problem. (See commentaries on these topics here, here and here.)

“These rules follow international standards and are designed to keep the financial system clean, free from corruption and guard against financial crime. It’s important that they are implemented proportionately and don’t create unnecessary barriers for public servants and their families. We have already persuaded some firms to improve their approach and we will use this review to identify if we need to provide further guidance to firms,” Sarah Pritchard, executive director of markets at the FCA, said. 

The FCA said financial firms must conduct extra checks on political figures, their families and close associates. More than 200 countries and jurisdictions have signed up to the standards set by the Financial Action Task Force – the group of countries that focus on AML and related matters.

“However, if rules are applied inappropriately by firms, then individuals may find themselves excluded from products or services through no fault of their own,” the FCA said in its statement. 

“The application of PEP risk assessments is only part of the wider collective drive to combat financial crime in the City. A review, with that goal, is beneficial to the City," Richard Burger, partner in the investigations group at WilmerHale and a former investigative lawyer and prosecutor with the FSA (predecessor to the FCA), said.

The definition of a PEP derives from the international standards issued by the Financial Action Taskforce, the FCA said. 

The regulator’s review of the PEP system is separate to its data request on bank account closures, which will report back initial findings later in September.

Beyond the PEP issue, a cause of the outcry over the Farage case was that the political and media figure’s views jarred against the bank’s views on areas such as LGBTQ rights, Brexit and climate change. The event raised questions on why the opinions of a client should have any bearing on whether they were eligible to have an account in the first place. UK Prime Minister Rishi Sunak warned that the episode highlighted a threat to free speech. 

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