Unwrapping the FCA's latest Financial Crime Guide updates

The FCA has issued a new consultation paper, CP24-9 (‘the Consultation’), proposing updates to its Financial Crime Guide (FCG). The updates are aimed at enhancing firms’ understanding of the FCA’s expectations regarding financial crime controls, as well as reflecting the FCA’s most relevant and recent findings. The FCA's objective is also to assist firms in evaluating the sufficiency of their financial crime systems and controls and resolving any shortcomings.

Below we have outlined the main updates proposed by the FCA.

1. Sanctions

As a consequence of Russia’s invasion of Ukraine, the FCA conducted extensive assessments of firms’ sanctions systems and controls. This resulted in the publication of a good and poor practice report in 2023 (our article on the report can be found here) and the Consultation is now proposing to update the FCG. The updates propose more rigorous controls and checks, increasing the obligation on firms to identify and block financial transactions that may breach international sanctions. This includes enhanced due diligence and ongoing monitoring requirements.

Some points to stress are that the Consultation clarifies the FCA’s expectation to be notified by firms it supervises if they are subject to sanctions (either directly or indirectly) under Principle 11. Furthermore, as firms are required to notify the FCA about significant rule breaches, the Consultation also proposes that firms should consider whether they should report sanctions breaches to the FCA if it results from (for example) a significant failure in their financial crime systems and controls.

This is consistent and complementary with a previous communication where the FCA stated that it expects to be notified by firms if:

• A person they deal with, directly or indirectly, is a designated person; 
• It holds any frozen assets; and
• It discovers, or suspects any breach while conducting their business.

2. Proliferation financing

The Consultation emphasises the need for firms to develop specific proliferation financing risk assessments (as required by the 2022 update to the Money Laundering Regulations (MLR)) and control mechanisms to prevent financial services from being exploited for the proliferation of weapons of mass destruction. This will involve more stringent oversight and reporting processes. Proliferation financing is now explicitly referenced throughout the FCG, where appropriate.

3. Transaction monitoring

There is a push from the FCA for improved systems that can more effectively detect and report suspicious transactions. The FCA intends to maintain its position that automated monitoring is only required where appropriate for the size and nature of the business and is not necessary if manual processes achieve an effective outcome. The updated FCG will compel firms to consider, more formally, whether using advanced analytical tools is appropriate to handle the growing volume and complexity of financial transactions and to demonstrate that they have an understanding of the effectiveness of the monitoring, especially if using new technologies in digital platforms.

4. Cryptoassets

Recognising the rising prominence of cryptoassets, the FCA is looking to set an expectation that FCA registered firms under the MLR as cryptoasset businesses, take into account the FCG when designing their financial crime systems and controls. The FCA has established clearer guidelines for cryptoasset businesses to ensure they are compliant with anti-money laundering and counter-terrorist financing laws. The updates to the FCG include references to the travel rule in the section that already exists for customer payments. In addition, the Consultation proposes additions to sections on risk assessment, handling higher risk situations and fraud, and reflects some of the findings of good and poor practice when using blockchain analytics as part of transaction monitoring.

5. Consumer Duty

The Consultation proposes the inclusion of expectations that firms act in the best interests of consumers. The FCA has proposed that firms should evaluate whether their financial crime systems and controls align with their responsibilities under the Consumer Duty. Firms should consider introducing extra measures in their customer journeys to thwart fraud and provide additional support to customers. The Consultation also suggests that firms should furnish information about the application process or the outcome of the application for their products and services, ensuring transparency and fairness in financial dealings, particularly how data is used and financial products are marketed and sold.

6. Consequential changes

The FCA is proposing other changes to help ensure the guide remains current. These include refreshed links within the FCG, as well as updated examples of good and poor practice.

Implications for regulated firms

These proposed changes mean that UK regulated firms need to update their current compliance and risk management frameworks to align with the new guidelines. This could involve: repeating or updating their risk assessments; implementing new training programmes for staff; investing in technology; and possibly re-evaluating existing client relationships and procedures. 

While the FCA expects firms to consider the FCG when designing their financial crime systems and controls, it is not a standalone document. It needs to be read in conjunction with existing laws, rules and guidance on financial crime.

Engagement with the consultation process

The FCA is seeking feedback from industry professionals to refine these proposals. Participation in the consultation process offers firms a chance to influence the final guidelines, ensuring they are practical and reflective of the industry's capabilities and needs.

Overall, the updates to the FCG are designed to make the UK's financial services sector more resilient against crimes that threaten its integrity and stability. For firms, staying ahead of these changes and preparing for their implications will be crucial in maintaining compliance and safeguarding their operations against potential financial crime risks.

At Cosegic, we are experienced in assisting firms with their financial crime obligations if your firm needs support, please do get in contact; we would be happy to help.