10 December 2015 - Post by:Sarah Hitchins
On Wednesday, Rob Grupetta – Head of Financial Crime at the FCA – delivered a speech which set out a blueprint for how the FCA sees the future of anti-money laundering regulation in the UK. In that speech, Mr Grupetta highlighted a recent development that has received little publicity. Namely, the proposal to introduce new ‘financial crime returns’ that firms will be required to submit to the FCA on an annual basis. These returns are intended to provide the FCA – and the industry – with a better insight into emerging financial crime risks and steps taken by firms to mitigate such risks.
What are ‘financial crime returns’?
Tucked away in the FCA’s latest Quarterly Consultation Paper was information about the FCA’s proposal to require certain firms to submit financial crime returns.
The FCA is proposing to require firms to provide a range of aggregated information to the FCA on an annual basis as part of this financial crime return, including:
- The locations of a firm’s customers.
- The jurisdictions where a firm does business which it considers to be ‘high risk’.
- The resources that a firm allocates to tackling financial crime.
- The number of suspicious activity reports that a firm has filed.
- Sanctions and asset freezes.
- The firm’s ‘general views on which are the most prevalent types of fraud’.
Firms will be required to submit this information electronically through the FCA’s GABRIEL platform using a prescribed form.
Which firms will be required to submit these financial crime returns?
The FCA is proposing to require approximately 3,600 firms to submit financial crime returns each year. The requirement to submit these returns will apply at legal entity level to those firms subject to the Money Laundering Regulations 2007, including banks, building societies and PRA-designated investment firms, as well as some general insurance firms and Lloyds Managing Agents. It will also apply to credit unions and friendly societies, subject to certain criteria. The FCA is also proposing to impose a materiality threshold, meaning that certain smaller firms will not be required to submit financial crime returns.
What will the FCA use this data for?
In his speech, Mr Grupetta explained that the FCA intends to use the data it gathers from financial crime returns to ‘detect emerging financial crime risks, and to target our supervisory work more accurately – it will increase our level of confidence that we are focusing our limited resources on the firms that face higher inherent financial crime risks’.
The FCA’s GABRIEL platform (through which financial crime returns will be submitted) will be configured so automatic alerts are generated. These alerts will flag any potential issues connected with a firm’s financial crime return to the relevant supervisory team. As a result, financial crime returns may serve as an additional way for the FCA to receive notifications of potential issues with firms’ financial crime controls. For example, if a firm is seen as having dedicated significantly fewer resources to financial crime than or submitted considerably fewer suspicious activity reports than its peer firms, this may give rise to concerns on the part of the FCA about the firm’s approach to tackling financial crime risks. These concerns may give rise to questions and requests for information being made by that firm’s Supervision Team or the FCA’s dedicated Financial Crime Supervisory Team. If satisfactory responses are not received to these questions or requests, or additional issues are uncovered, a firm could find itself facing the prospect of a referral to the FCA’s Enforcement Division.
In his speech, Mr Grupetta also suggested that the data gathered from financial crime returns may be of assistance to the industry and specifically to MLROs. This suggests that the FCA will publish this data on an aggregated (i.e. non-firm specific and anonymised) basis. It is likely that this will be done in a similar way to how the FCA currently publishes aggregated complaints handling data it receives from firms (available here). Publishing this data on an aggregated basis is likely to help firms to ‘benchmark’ themselves against their peer firms. How helpful this will be though will depend on how the FCA presents its aggregated basis (e.g. split by size or type of firm).
Challenges ahead for firms?
As Mr Grupetta acknowledged in his speech, ‘financial crime is not always a topic that lends itself easily to statistical analysis’. Identifying and providing the aggregated data that the FCA proposes to require in annual financial crime returns may prove challenging for a number of firms. In light of this, the FCA has indicated that it would welcome feedback from firms as to the feasibility of providing the information it is proposing to request in financial crime returns. However, given what the FCA is trying to achieve through its financial crime returns, it is unlikely that there will be too much for manoeuvre. Firms should therefore start thinking about whether it can obtain the data that the FCA will request in its financial crime return and, if so, how.
In contrast to the data that firms will be required to submit as part of financial crime returns, firms will also be required to respond to the (very general) request for its ‘general views on which are the most prevalent types of fraud’. Firms’ responses to this item will need to be carefully thought-through. They may also require firms with multiple business lines to assess internally a great deal of information relating to a variety of business areas and products.
All this is perhaps at odds with the FCA’s statement in its Quarterly Consultation Paper that the cost to firms of producing annual financial crime returns ‘should be relatively low’ – in part because ‘most of the information that [the FCA] propose[s] to ask for will already be available to firms’.
Requests for financial crime returns will not be made immediately. The FCA’s consultation relating to financial crime returns closes on 4 February 2016. Once the consultation closes, it is likely that we will get a better idea of when the FCA will require the first financial crime returns to be submitted.