In December 2015 the Financial Conduct Authority (FCA) consulted on a proposal to introduce a requirement for certain types of firm to complete an annual financial crime return. The results of that consultation were published in July 2016, along with the final rules taking effect from 31 December 2016 (see PS16/19).
Consistent with the FCA’s Business Plan 2016/2017 the above document makes tackling financial crime a priority and notes that the FCA has a statutory duty to enhance the integrity of the UK’s financial system.
At present the FCA relies on the use of ad hoc data requests and the rules are therefore intended to produce a standardised information flow which the FCA can analyse. As the FCA noted in PS16/19:
“We do not currently routinely gather information from firms about financial crime, the risks they are exposed to, or how they manage those risks. This affects our ability to operate a truly risk-sensitive supervisory approach in line with global standards. Consequently, we propose to introduce a financial crime return for the first time.
We will use the data collected by this return to support our financial crime supervision strategy. Analysing the data will enable us to conduct more desk-based supervisory work than is currently possible. In turn, this will help us identify financial crime risks and trends, as well as possible emerging issues. It will also ensure we have better quality and more consistent comparable data, allowing us to accurately risk-rate firms and better target our specialist resources on firms that pose the highest financial crime risk.”
Accordingly, from 31 December 2016, the FCA will require certain firms to submit an Annual Financial Crime Report.
Which firms will be required to submit an annual report?
The rules will apply to the firms subject to the Money Laundering Regulations, including:
- building societies
- designated investment firms
- investment firms
- mortgage lenders
- electronic money institutions
- full permission consumer credit firms
- life insurers
- retail investment intermediaries, and
- mortgage intermediaries
At present, general insurers will be exempt from having to report, but the FCA has said it will look at including those firms at a later date.
The FCA has also included a proportionality rule that will exempt retail investment intermediaries and mortgage intermediaries, investment firms, consumer credit firms, and electronic money institutions with revenue of less than £5m from having to file a report.
What will the report need to include?
The FCA has developed a standard template form that firms subject to the rules will have to fill out within 60 business days of the end of their next reporting period falling on or after 31 December 2016.
As a concession to concerns raised about whether firms will be fully prepared by the end of 2016, in the first year of the new requirement, firms will be able to submit the data on a “best endeavours basis”.
The template sets out 35 questions, which include:
- the number of “politically exposed persons” and other “high-risk customers” the firm has dealings with;
- the geographic areas in which those individuals are located;
- the number of ‘suspicious activity reports’ the firm has submitted internally, as well as those disclosed externally to the National Crime Agency or under a consent order;
- data relating to the firms’ compliance with international sanctions; and
- detail as to what the firm believes to be the top fraud risks the FCA should be aware of.
Firms operating within a broader group structure will be able to submit a single financial crime report for a set of regulated firms within the same group, as long as the firms included all share a common financial year end.
The FCA will require that the information is submitted using its electronic reporting system, GABRIEL, which it hopes will ensure that data is received in a standardised format, allowing for improved consolidation, peer-group analysis and cataloguing.
Many firms within the ambit of the rules will already have the data required by the report in accessible form. If so, the obligation to submit a standardised format should not represent a significant additional burden.
Firms though that are unable to answer the questions on the FCA template with relative ease may find themselves the subject of increasing FCA scrutiny in the future, so should consider as a priority why they are not able to access the required information and what steps they need to take in order to be able to do so.
Firms who, pursuant to the final rules, are required to submit a report are also likely to be subject to the Fourth Money Laundering Directive (4MLD) when it comes into force in the UK in June 2017. Although not directly related the necessity to submit an Annual Financial Crime Report and the obligation to produce those reports may provide a timely opportunity to firms to also ensure that their systems and processes will be compliant with the 4MLD.