The United Kingdom has recently made significant adjustments to its regulations concerning Politically Exposed Persons (PEPs). These changes primarily focus on the treatment of domestic PEPs and have been implemented to provide a more balanced approach to risk management in the financial sector.
The UK government’s recent amendments to the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017, known as the MLRs, have brought significant changes to the treatment of domestic PEPs. These changes were officially enacted on January 10, 2024.
The new regulations have been developed to encourage a more proportionate and risk-based approach to the treatment of domestic PEPs, and they are expected to impact multiple sectors, including the financial industry.
PEPs are individuals who hold prominent public functions, either domestically or internationally. Given the nature of their roles, PEPs are often seen as carrying a higher risk of involvement in bribery, corruption, and other forms of financial crime. As a result, they have traditionally been subjected to Enhanced Due Diligence (EDD) by financial institutions.
However, the recent regulatory changes have distinguished between domestic and foreign PEPs, with different risk assessments and due diligence requirements being applied to each.
With the new amendments, domestic PEPs are now considered to be inherently lower in risk compared to non-domestic PEPs. Unless there are other higher-risk factors present, the extent of EDD measures applied to a domestic PEP should be less than that for a non-domestic PEP.
This represents a significant shift in the approach to PEP risk management and is expected to have substantial implications for how financial institutions conduct their compliance procedures.
For domestic PEPs, the changes mean that they are no longer automatically classified as high-risk clients by banks and other regulated firms. Instead, these firms are now required to apply a lower level of EDD to domestic PEPs, unless there are other risk factors that would warrant a higher level of scrutiny.
This has been seen as a positive development by many, as it reduces the potential for unnecessary barriers to accessing financial services for public servants and their families.
While the changes have been welcomed by some, they have also sparked debate among industry experts. Some have raised concerns about the potential for confusion around how the revised regulations should be implemented.
There are questions about when enhanced measures will be applied, how higher-risk factors will be identified, and what impact these changes will have on firms’ ability to detect and prevent financial crime.
In response to the regulatory changes and the concerns raised by industry experts, the Financial Conduct Authority (FCA) has launched a review of its guidance on the treatment of PEPs.
The review, which is expected to report by the end of June 2024, will assess how firms are applying the definition of PEPs, conducting risk assessments, applying EDD and ongoing monitoring, deciding to reject or close accounts for PEPs, and keeping their PEP controls under review.
For financial institutions, the changes to the regulations mean that they will need to revise their compliance procedures and systems to reflect the new risk assessment requirements for domestic PEPs. This will likely involve updating their policies and procedures, training staff on the new regulations, and potentially modifying their risk assessment tools and systems.
To comply with the new regulations, firms are expected to consider a range of factors when assessing the risk associated with a domestic PEP. This includes the nature of the PEP’s public role, their access to public funds, the transparency and integrity of the public administration system in which they operate, and any other relevant risk factors.
Looking ahead, it is likely that the regulatory landscape for PEPs will continue to evolve as the implications of the new regulations become clearer. Financial institutions will need to stay abreast of these changes and ensure that their compliance procedures and systems remain up-to-date and effective.
KYC Hub is a leading provider of compliance automation and customer onboarding solutions. With a deep understanding of the regulatory landscape and a commitment to simplifying complex procedures, KYC Hub is the go-to choice for financial institutions navigating the changes to PEP regulations.
Our innovative solutions help firms streamline their compliance procedures, reduce the risk of financial crime, and provide a seamless onboarding experience for their clients.
The recent changes to the UK’s regulations on domestic PEPs represent a significant shift in the approach to PEP risk management. While the changes have been welcomed by some, they have also raised questions and concerns that will need to be addressed in the coming months.
Financial institutions will need to carefully monitor these developments and ensure that their compliance procedures and systems are adapted accordingly.
People are also reading:
PEP (Politically Exposed Persons) screening represents a critical safeguard in financial institutions to prevent...
Read More
Relatives and close associates are individuals who may not have significant public roles but...
Read More
