Compliance Digest: 14th June 2024

Welcome to this week’s Compliance Digest.  Here is a summary of two of the issues that have come into my industry news feeds this week.

• The value of protection

• Customer Due Diligence within KYC

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The value of protection

An article in Money Marketing has highlighted that in 2023 the insurer Vitality paid out over £117 million in claims.  Life insurance claims amounted to £83.5 million with serious illness cover claims totalling £32.7 million and income protection £1 million. 

Vitality also said it has paid out over £446 million in protection claims over the last five years.  The claims data published on 13th June 2024 showed that cancer was the most common cause of claim across all protection products, for both men and women.  Most claimants were people in their 30s and 40s across serious illness cover and income protection.

LV= confirms that is paid claims totalling £135 million in 2023 and Aviva  paid £1.18 billion to more than 50,600 claimants.

This indicates that in 2023 families in the UK were helped by nearly £1.75 billion in protection claims from these three companies alone.

There is a focus on investment into pensions, ISAs and GIAs to improve the wealth of our clients and some clients are drawing on their investments and may not have protection needs.  For those still accumulating their wealth, diverting some funds into protection provides a vital safety net for their families and loved ones.  There is evidence that there is a protection gap as well as a savings gap.  I have written previously about the need to discuss business protection for your clients who are business owners.  There is good reason to discuss protection with your employed clients and assess if their employee benefits will meet the needs of their family should either earner pass away.

If you would like to Compliance Matters UK Limited to provide either online or face to face training regarding protection planning, please contact us.

Customer Due Diligence within KYC

The FCA requires that firms identify and verify their clients and, where applicable, the beneficial owners of corporate clients, partnerships, and Trusts.  This is Customer Due Diligence (CDD).

Firms must also understand the purpose and intended nature of the client’s relationship with the firm and collect information about the client and, where relevant, beneficial owner.  This should be sufficient to obtain a complete picture of the risk associated with the business relationship and provide a meaningful basis for subsequent monitoring.

Your firm must obtain sufficient information about a client’s personal and financial circumstances to be able to make a suitable recommendation.  This includes:

• What the client owns and owes

• Do they have surplus income at the end of each month. 

• A detailed budget.  Essential if you are undertaking a cashflow model

• Identifying the client's goals and objectives

• Assessing the client's attitude to investment risk

• Capacity for loss if the investment does not perform well in the short term.

This is Know Your Customer (KYC)

CDD is the key to addressing the risk that your firm may be used to facilitate financial crime.  Whilst it should be applied on a risk basis, it is not ‘once and done’.  The Money Laundering Regulations require that clients are periodically screened against PEP and Sanctions databases.  Based on the risk your client poses to your firm, you should consider updating your identification and verification with a regularity that meets your firm’s risk appetite.

Your firm may adopt an electronic verification check, if so, you should understand its capabilities and limitations.  You may decide to support electronic verification with a request for documentary evidence.  If your firm relies solely on documentary evidence this should be renewed periodically, particularly if your client moves address.

Questions your firm should consider regarding CDD:

• Does your firm apply a risk based CDD process?

• How does your firm identify beneficial owners of business, partnerships, and Trusts?

• Are your procedures sufficiently flexible to cope with clients that cannot provide more common forms of identification?

CDD for corporate clients

When providing advice to corporate clients, your firm will need to complete CDD on the corporate client itself as well as any beneficial owners.  For limited companies and limited liability partnerships (LLP), a search of Companies House records will confirm the registered address for the company, the names of the officers and the details of any individuals who have a beneficial ownership.  Your firm should follow its procedures for identifying and verifying individual clients.  You may want to search for adverse publicity about the corporate entity and the beneficial owners using an internet search engine.

CDD for Trusts

If your client is a Trust, retain a copy of the Trust Deed.  All parties to the Trust will need to be identified and verified as far as is possible, this will be the Settlor, Trustees and Beneficiaries unless there is a provision for unborn children.

CDD for Partnerships

In addition to retaining a copy of the Partnership Agreement, all Partners should be identified and verified as if they were individuals.  A Limited Liability Partnership (LLP) will be listed on Companies House and the details listed saved into your client file.

As you can see, there is connection between comprehensive KYC and CDD, the results of CDD may prompt you to carry out further KYC.

If you would like Compliance Matters UK Limited to review your compliance systems and controls schedule a free, no-obligation consultancy call with us today. 

To learn more about how Compliance Matters UK Limited can support your firm, click here. 

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Ian Ashleigh