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#Anti Money Laundering #Governance, Risk and Compliance #Financial Crime Prevention #Customer Due Diligence

The FCA Annual Report: taking a closer look

International Compliance Association

Here in the UK, after weeks of blanket media coverage around Brexit, a change of Prime Minister and the legal complexities involved in the Labour leadership election, we could be forgiven for wanting a change of subject matter.

So the Financial Conduct Authority’s (FCA) Annual Report for 2015/16 could provide a welcome respite for financial services professionals, though it’s not exactly what you might call light reading.

The FCA has thoughtfully highlighted in the accompanying press release some of its headline activities over the year, including implementing the Senior Managers and Certification Regime (SM&CR), the new regulatory framework for individual accountability, and issuing penalties totalling £884.6 million as a result of enforcement action, as well as barring 24 people from working in financial services. 

 

De-risking

In glancing through the report (and I’m not claiming to have read it in its entirety) a few things caught my eye as a result of seeing some familiar phrases connected with areas we focus on at International Compliance Training  and the International Compliance Association.

I’ve recently been doing some work relating to the ICA Specialist Certificate in Money Laundering Risk in Correspondent Banking and, more specifically, de-risking, the practice of withdrawing or restricting services to categories of customers deemed to be high risk, so I was interested to see what the FCA had to say on this.

There are a couple of references, including a reminder that the FCA considers the ‘appropriateness of firms’ de-risking strategies’ during anti money laundering (AML) assessments. The FCA also makes the point that a bank’s decision to work with a customer is ultimately made on commercial grounds, but adds: ‘We think that there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements.’

It’s not the first time the FCA has said this: Rob Gruppetta, who heads the FCA’s financial crime department, used the same words in a speech in December last year. And it’s no surprise that the FCA is singing from a similar hymn sheet as the Financial Action Task Force, which has made clear that ‘the wholesale cutting loose of entire countries and classes of customer’ is not in line with its standards.

But with a lot going on around correspondent banking at the moment, a sector closely associated with de-risking – including recent input from the International Monetary Fund and Bank for International Settlements – it’s a useful reminder of the FCA’s stance.

 

Corporate culture

The issue of corporate culture tends to rise up and down the news agenda, usually depending on whether a big business has been behaving less well than it should have. The recent Volkswagen emissions case and, here in the UK, the collapse of retail group BHS have refocused interest on the business benefits of a ‘doing the right thing’ culture – an approach likely to have helped curb the kind of conduct that led to the financial crisis and the damaging loss of trust it created.

It’s a fascinating issue and one that generated headlines when the FCA dropped a planned thematic review of banking culture, exploring ‘whether culture change programmes in retail and wholesale banks were driving the right behaviour’, in favour of ‘engaging individually with firms’, which it said it saw as the most effective way to drive continuing culture change in the sector.

 

Conduct risk

Referring to this, the Annual Report stresses that the FCA has not changed its view about the importance of firm culture which, together with governance, forms one of seven priorities set out in its 2016/17 Business Plan. It also makes the point that its ‘work on raising standards focuses on proactive engagement to ensure that the industry itself increasingly takes responsibility for, and ownership of, conduct risk management.’

And it highlights the importance of the SM&CR in driving the greater individual accountability that the FCA says is ‘key to improving standards in the banking industry’, adding: ‘If things go wrong, it will help us to hold senior managers to account for misconduct that falls within their area of responsibility. It will also hold individuals working at all levels to appropriate standards of conduct.’

Given that it is very early days for the sm&CR, it’s very much a case of ‘watch this space’ when it comes to assessing how successful it will be. Meanwhile, it’s interesting to see in the Annual Report that the FCA has been looking at its own ‘tone from the top’ – considered an integral part of driving the right corporate culture – as part of a board effectiveness review, carried out at the end of last year: the review made recommendations in various areas, including ‘attention to corporate culture’.

 

Satisfaction levels

Meanwhile, given the generally dim public view of financial services over the post-financial crisis, the findings of an FCA consumer survey reported in the Annual Report provide encouraging feedback. Admittedly, the number of those surveyed was not large (ranging from 363 people for investment services and 2,001 for banking), but satisfaction levels were high.

For banking, credit, general insurance, investment, mortgages and savings, at least 77% of respondents said they were fairly or very satisfied with services, while banking and investment shared the top spot with a score of 88%. Perhaps the times really are a-changin’.

And so back to where we started: Brexit. It may not be mentioned by name, but its potential future impact on financial regulation is what you might call the ghost at the feast.

Just how closely the UK and Europe are integrated is demonstrated in content looking at the FCA’s role in influencing the global agenda, through organisations such as the International Organization of Securities Commissions and the Financial Stability Board.

Others include the European Banking Authority and the European Systemic Risk Board, with senior FCA executives also chairing key committees of the European Securities and Markets Authority and sitting on its board of supervisors. The report also refers to the FCA’s ‘particularly key role in influencing and implementing European legislation.’

In his foreword to the report, FCA chairman John Griffiths-Jones touches on the outcome of the EU referendum and the close relationship of the UK and European regimes, along with the implications this has post-Brexit: ‘Muchfinancial regulation currently applicable in the UK derives from EU legislation…The longer term impact of the decision to leave the EU on the overall regulatory framework will depend in part on the relationship that theUK seeks with the EU in future.

That’s an issue very much to be decided, so it will be interesting to see how things stand by the time the next FCA Annual Report rolls around. Whatever the future holds, the ICA offers a wide range of qualifications in anti money laundering, compliance and financial crime prevention, suitable for all levels of knowledge and expertise and teaching practical skills to help students in their careers and bringing real benefits to the organisations they work for.

 

To find out more, why not sign up for one of our free information sessions, which are taking place in locations around the world? 

 


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