The FCA Handbook and Money Laundering – an introduction

The Financial Conduct Authority (“FCA”) provides for guidance through its handbook, a document that although broken into sections, cumulatively runs for hundreds of pages.  This can be pretty daunting for those either looking to become regulated or trying to remain so; after all, no two days are the same and questions on practice will arise from time to time.  As part of our commitment to ensuring our clients have access to the best information, Get Regulated has put together a short series of bite size documents, breaking down the responsibilities of Firms, that of the Money Laundering Reporting Officer (“MLRO”) and what they need to consider as part of their role in certain situations.

Where does this stem from?

Section 2 of the Financial Services and Markets Act 2000 (“FSMA”) sets out the following regulatory objectives for regulated firms – to maintain:

• “Market confidence;
• Public awareness;
• Protection of consumers;
• Reduction of financial crime(emphasis added)”.

It is the latter that is given greatest focus in the FCA handbook, with “one aspect of the reduction of financial crime objective is the risk of the businesses of relevant firms being used in connection with offences which involve handling the proceeds of crime. It follows that an effective and proportionate regulatory regime is important in reducing the extent to which it is possible for the businesses carried on by relevant firms to be used for money laundering” [1].

One of the ways in which the FCA looks for firms to achieve this aim is requiring them to not only have the appropriate policies and procedures in place, based on an appropriate risk assessment, but to ensure they have an MLRO in place at all times.

Who needs an MLRO?

All relevant firms must appoint an MLRO.  A relevant firm means every firm that does not fall into the category of:

• General insurance business;
• Insurance mediation activity;
• Long-term insurance business;
• Contracts relating to Regulated Activities Orders;
• General insurance contracts through Lloyds or managing the underwriting capacity of a Lloyd’s syndicate as a managing agent;
• Mortgage mediation activity.

It should be noted that prior to Brexit coming into effect, S.264 of the Financial Services and Markets Act 2000 allowed for the passporting of firms licenced in the EU to work under that licence within the UK.  This has since been repealed.

What is an MLRO responsible for?

The MLRO is “responsible for the oversight of the relevant firm’s anti-money laundering activities and is the key person in the relevant firm’s implementation of anti-money laundering strategies and policies…[1]”

The duties of an MLRO also apply to a firm’s appointed representative(s) should they engage them in the course of their regulated activities.

What is the Firm’s duty?

Simply, a Firm must identify their clients and, except for in certain circumstances, must not engage in regulated activities, or agree to do so, without having done so first. 

What is a client?

A client includes:

“(i) a potential client;

(ii) a client of an appointed representative of a firm with or for whom the appointed representative acts or intends to act in the course of business for which the firm has accepted responsibility under section 39 of the Act (Exemption of appointed representatives);

(iii) a collective investment scheme even if it does not have separate legal personality;

(iv) if a person (“C1”), with or for whom the firm is conducting or intends to conduct designated investment business, is acting as agent for another person (“C2”), either C1 or C2 in accordance with COB 4.1.5 R…[2]”

What is a transaction?

This includes the giving of advice and any other business or service undertaken whilst carrying out a regulated activity.

The duty in more detail

Firms must take reasonable steps to identify their clients by obtaining sufficient evidence to show they are who they claim to be.  If the client is claiming to act on behalf of another, then that evidence must relate to both identities.

Specifically relating to Money Service Businesses, if either the client or their representative engages in that activity, then their identity must include their registered number (with HMRC) as per the Money Laundering Regulations.

Financial Exclusion

The FCA makes specific provision for those who could be viewed as being financially excluded.  There are some who cannot produce detailed evidence of identity; for example those who do not have a passport or driving licence, or perhaps do not have utility bills addressed to them.  In that situation, if a Firm has grounds to consider this is the case, they may accept as identification a letter or statement from a person in a position of responsibility who knows the client and can attest to their identity.  Such persons can include solicitors, doctors, teachers, ministers of religion, social workers and hostel managers.

When should you identify?

Firms need to do it as soon as reasonably practicable after they have either agreed to carry out the regulated transaction or reached an understanding that the Firm may carry out future transactions.

Should the client fail to provide the evidence requested within the necessary timescale, the Firm must:

• Discontinue any regulated activity; and
• End any understanding it may have had with the client about future transactions.

The only exception to this is if the Firm has informed the National Crime Intelligence Service, more of which is covered in later articles.

Conclusion

This is just the tip of an iceberg regarding the requirements of Firms to ensure they have all the appropriate measures in place to further the regulatory objectives prescribed by FSMA.  If you have any questions at all or need advice, we would be delighted to hear from you. 

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[1] https://www.handbook.fca.org.uk/handbook/ML/2/1.html?date=2005-04-02

[2] https://www.handbook.fca.org.uk/handbook/ML/3/1.html?date=2005-04-02

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[1] https://www.handbook.fca.org.uk/handbook/ML/1/2.html?date=2005-04-02