The FCA has recently published two thematic reviews regarding bribery and corruption in commercial insurance broking and anti-money laundering risks faced by small banks. Both thematic reviews are updates on previous reviews conducted by the FCA's predecessor, the FSA, published in 2010 and 2011.
While these reviews are specific to certain sectors, both are relevant for all organisations regulated by the FCA, and the FCA will expect firms to be aware of the issues identified. We look at each thematic review in turn, drawing on some of the emerging themes, and highlight areas of "good practice".
Managing bribery and corruption risk in commercial insurance broking
Firms regulated by the FCA are required to have in place systems and controls to manage bribery and corruption risk ("ABC"). This is distinct from the requirements under the Bribery Act 2010, which the FCA is not responsible for upholding and therefore this review did not analyse firms' compliance with the Act.
The FCA's review found that most of the firms in its sample were not adequately managing bribery risks and that a number of firms had not paid heed to the FSA's warnings in its previous review.
The FCA identified three key messages that firms are encouraged to comply with going forward:
- business-wide risk assessment – identifying bribery risks across the trading and non-trading aspects of business and assessing risks with all parties in the chain;
- individual relationship risk assessments – the FCA expects firms to assess risk on a business wide level, rather than just assessing risk on a jurisdictional level; firms are advised to assess risks such as the sector, levels of commission payments, class of business involved and whether there is any political risk; and
- governance and management information – ensuring that senior management have oversight of risk management.
The main theme is therefore ensuring that holistic risk assessments are conducted both at a business wide level but also at a more granular relationship level and conducting risk assessments that assess a number of different relevant factors. Once such assessments are done, the results should be provided to management and any issues raised as necessary.
The FCA has provided a number of recommendations for "good practice" including the following:
- appointing an Anti-Corruption Officer or otherwise appointing a senior manager with responsibility for ABC
- ensuring risk assessments and due diligence are conducted using a number of different risk factors and then aggregating these risk factors to create an overall risk ranking
- ensuring that business rationale for third party introducing arrangements is clearly recorded
- where a higher-risk relationship is identified, seek senior management approval for the relationship with a full audit trail of the reasons justifying the high risk relationship
- set meaningful and proportionate gifts and hospitality thresholds that are relevant to the business, set up registers to record this including where proposed gifts or hospitality have not been approved
- ensuring that remuneration structures do not depend solely on the level of business generated and including a compliance element in bonus schemes
- implementing a training programme that is repeated periodically
- conducting a gap analysis of the FSA's initial thematic reviews on ABC and also the Final Notices that have been issued in this area
- creating an "Aide Memoire" for staff listing key points about ABC
The consequences for failing to meet the FCA's requirements can have significant financial and reputational repercussions. Following the results of this thematic review, two firms reviewed voluntarily agreed to limit their business with certain third party introducers until remedial work had been completed and both firms were required to formally attest to the FCA that they had completed remedial work.
How small banks manage money laundering and sanctions risk
The thematic review update on anti-money laundering ("AML") presents similar themes to those identified in the ABC review, particularly in relation to senior management involvement.
The results of this review identified the following key failings:
- weak AML controls and risk assessments, with insufficient Enhanced Due Diligence ("EDD") and on-going monitoring of high risk customers, politically exposed persons ("PEPs") and correspondent banks;
- inadequate AML resource and expertise; and
- over-reliance on group companies particularly where the head office of the bank is located overseas and therefore reliance on that entity to conduct customer due diligence ("CDD") often did not meet UK standards.
While the FCA found that most retail, wholesale and private banks had implemented effective AML and sanctions controls, they were disappointed to find continuing weaknesses at smaller banks, particularly given the work previously done to highlight these issues.
The FCA has provided a number of recommendations for "good practice" including the following:
- establishing a financial crime committee
- ensuring the annual MLRO report is reviewed at a board meeting
- establishing commitment of senior management, encouraging a compliance culture and involving senior management in decision making
- ensuring division of roles – i.e. ensuring that the internal audit function isn't being performed by someone in compliance
- conducting a full risk assessment including consideration of the products or services, the business, source of funds, source of wealth, expected activity and establishing the ultimate beneficial owner
- conducting PEP screening on both the new and existing customer base and reviewing periodically
- conducting gap analysis of the FCA's past enforcement action and the thematic reviews
As with the ABC review, the consequences for failure to meet the FCA's required standards can be severe. Following the latest review, the FCA has started enforcement action against two banks; required skilled persons reviews to be conducted at three banks; limited business activity (albeit voluntarily) at four banks and sought remedial work at three.
Conclusion
Both reviews were published at the same time as the FCA opened a consultation on its Financial Crime Guide and so these reviews form part of a wider focus by the FCA into financial crime systems and controls.
The emerging theme is clear, where firms have been warned of the risks and they take no action or inadequate action, the FCA will take a zero tolerance approach. It is therefore wise to start taking precautions now to prevent the threat of enforcement action later.
Links to the full Thematic Reviews are set out below.
Managing bribery and corruption risk in commercial insurance broking
How small banks manage money laundering and sanctions risk
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
