The FCA has publicly announced an expectation that, in the context of managing money laundering risks, banks should not indiscriminately withdraw services from market sectors.
Brokers and asset managers with appropriate financial crime policies and procedures should have improved prospects to access bank services in difficult market conditions.
As a natural commercial response to the demands of ever increasing financial crime regulation (ABC, AML and sanctions) and punitive fines for systems and controls failings, some banks have ceased to provide services to categories of customer whose business they consider to be higher risk.
Brokers across all sectors (securities, derivatives, credit and insurance) and asset managers with customers in high risk categories, emerging markets in particular, may find access to money transmission, clearing and custody services blocked or restricted.
The UK Financial Conduct Authority (FCA) has reacted with the policy statement (published 27 April 2015):
" ...we expect banks to recognise that the risk associated with different individual business relationships within a single broad category varies, and to manage that risk appropriately" and "...we think that there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements."
The FCA's view is that firms should be capable of managing their risk, such as their money laundering risk, without having to withdraw services in entire markets, geographic regions or to categories of customers. The FCA is clearly concerned about the negative impact on customers of wholesale de-risking who will no longer have satisfactory access to banking services.
There are rules and principles in the FCA Handbook which may be relevant to an assessment of banks' customer service obligations, including the obligations to treat customers fairly; to act fairly and in the best interest of customers; and in relation to managing conflicts between the banks' own interests and those of their customers. The FCA also considers that wholesale de-risking may give rise to consumer protection and/or competition issues.
In most cases, we are doubtful about the extent to which de-risking policies taken for legitimate commercial reasons can be characterised as contrary to the regulatory regime. Nonetheless, many banks, conscious of their relationship with regulators, are likely to wish to be seen to be adopting a more flexible approach.
The key consideration for brokers and asset managers to procure and maintain access to bank services is demonstration of their own robust financial crime systems and controls in which the banks can have confidence. There is nothing new in this approach, but its importance has increased. In many firms, the head of compliance, or legal, is no longer just the internal facing manager but also the firm's sales person, who is marketing the effectiveness and integrity of compliance systems and controls externally. The FCA policy statement should provide a tailwind to brokers and asset managers who have customers in high risk categories with the set-up to market their robust financial crime compliance systems and controls to banks.
Banks will be only too aware of the potential consequences of falling foul of the regulators on issues such as sanctions, AML or anti-bribery and corruption (ABC). Banks therefore, can be expected to take a conservative approach to the business of brokers and asset managers.
Two principal challenges to the ability to satisfy banks are (a) varying jurisdictional requirements (EU and the U.S. especially); and (b) the legal complexity of applying existing regulatory standards to new technological solutions.
Banking groups operating across a number of jurisdictions may take a high watermark approach to the financial crime regulatory standards to be applied group wide. Quite often, that high watermark of regulatory standards is established by the United States. Further, any U.S. dollar payments will generally be cleared in the U.S., again, making certain U.S. regulatory requirements applicable wherever the business is actually conducted. Fines for breach of financial crime compliance requirements (ABC, AML or sanctions) with respect to certain geographic regions, can be huge. Last year, for example, one bank agreed to pay almost US$9 billion to resolve allegations that it breached U.S. sanctions in Cuba, Iran and Sudan.
In light of such substantial penalties, banks have understandably questioned the overall benefits of doing business in higher risk areas and concluded that doing business in certain countries might simply be too risky to justify. This wholesale, geographical de-risking may not, however, be acceptable to the FCA, given its recent statement and push for an individual customer risk-based approach.
Brokers using technology-enabled platforms with innovative customer on-boarding and customer due diligence methods (such as in person Facetime ID), or new foreign exchange and payment services using correspondent brokers through ECNs and e-wallets, may find banks reluctant, at the operational level, to recognise the efficacy of arrangements that depart from their established policies and procedures.
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