Amid concerns about a lack of financial crime controls at certain firms — including unregulated lenders, money brokers and custody providers — the U.K.’s Financial Conduct Authority (FCA) is pledging to step up its oversight of these kinds of firms, and calling on regulated firms to boost their due diligence.
In a statement Friday, the regulator said that it’s increasingly concerned about the risks posed by a subset of around 1,200 firms that are registered with the FCA to ensure their compliance with anti-money laundering rules, but aren’t otherwise subject to its rules on conduct or prudential requirements.
In particular, the FCA said that it’s concerned about the potential for these firms to be used as conduits to facilitate financial crime.
The regulator said that it’s seeing firms that are improperly relying on financial crime controls created for a parent company or affiliate, rather than developing company-specific controls.
“Each individual firm within a group must assess whether these controls are appropriate for their financial crime risks, governance and operations. They also can’t rely on off-the-shelf procedures designed for a different company,” the FCA said. “Each must have controls tailored to the way they operate and the risks they need to manage.”
FCA said it is taking a closer look at these firms.
To start, it’s seeking additional information from these firms to enhance its understanding of their activities, business models and risks. It also indicated that registration applications will take longer as it steps up its scrutiny of firms’ ability to comply with anti-money laundering rules.
“We will use this and other intelligence to identify and disrupt financial crime risks in this sector,” the FCA said.
The regulator also flagged risks to investors, consumers and the mainstream financial industry from unregulated lending — particularly financing that’s being provided through complex financial structures, such as using special purpose vehicles and encouraging customers to set up shell companies to access unregulated bridge financing.
To address these risks, the FCA called on regulated financial firms to ensure that they are engaging in proper due diligence when undertaking financing arrangements with these kinds of firms — including measures such as conducting independent checks on information provided by these firms, confirming their registration status and identifying and managing any risks that arise from dealing with these firms.