Compliance Digest: 26th July 2024

Schools in England have broken up for the Summer at the same time as schools in Scotland start preparing for the new term. Summer cannot decide whether or not to fully download and bathe us in sunshine for more than a day at a time. Regulation continues. Here are some of the issues that affect our industry that have come to my attention this weeks Compliance Digest.

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Financial crime compliance – have we lost sight of what we are fighting for?
A generation of vulnerable adults
FCA confirms plan to protect access to cash for consumers and small businesses
FCA calls on firms to improve treatment of politically exposed persons (PEPs)

Financial crime compliance – have we lost sight of what we are fighting for?

A recent blog written for UK Finance estimates that the UK financial services sector spends £22,000 per hour fighting fraud and financial crime. The blog goes on to explore whether or not regulation has lost sight of what it is fighting for.

According to Assistant Commissioner at City of London Police, Peter O’Doherty, the focus needs to be on prevention, disruption and how to mobilise the private sector and law enforcement. “Sharing information intelligence, understanding the problem, and working together is the way forward,” he said. Peter believes progress has been made, noting that for the first time ever, “all policing and crime plans across the UK specifically refer to fraud as an addressable challenge.”

The challenge of how to effectively detect and prevent APP scams has been a perpetual headache for those designing anti-fraud technology, for some time. Recent tests with a major UK bank however, showed great promise. Using a combination of pure behavioural biometrics ‘type and swipe’ signals with live call data, beneficiary information and a range of other device and location intelligence resulted in a 120% uplift in scam detection and a 90% increase in the monetary value of prevented fraud. APP scams are particularly cynical in the way that they manipulate vulnerable customers. Finally getting the upper hand on them with the help of AI and advanced analytics will be a major coup for banks and customers alike.

Fraudsters and criminals are expert networkers, collaborators, and information sharers. No sooner is a scam dreamed up, it is shared across the dark web for others to benefit.

On a local level, how robust are your systems and controls for detecting and preventing fraud. If a client unexpectedly requests a withdrawal from their investment with you, what safeguards do you have in place to confirm the request is genuine?

A generation of vulnerable adults

I have written in the past that that as an industry we have lost sight of the need to review our clients’ protection needs. I have heard the argument that the demographic of an IFA’s clients means that they are generally beyond the need for protection. But what about the generation below your client, or the generation below that. I wrote last week about the need to put in the foundations so that you retain the wealth under your management as it cascades down the generations. Discussing protection issues may be the first step in building relationships with your clients’ heirs and beneficiaries.

It is estimated that 10 million adults below the age of 40 are without life assurance.

Sir Winston Churchill once said: “If I had my way, I would write the word ‘insure’ over every door of every cottage and upon the blotting pad of every public man, because I am convinced that, for sacrifice that are conceivably small, families can be secured against catastrophes which otherwise would smash them forever.”

The UK has found itself with a serious issue: a generation of vulnerable adults. The Consumer Duty has us so focused on the FCA characteristics of vulnerability that we have lost sight of one of the fundamental building blocks of financial planning – protection.

After creating a suitable emergency reserve in an immediately accessible deposit account (say, six-months’ essential expenditure) the next element of a financial foundation is protection, starting with life assurance. At the very least, to cover liabilities, for example, a mortgage.

Research indicates that many families would not have the financial resilience to cope if an earner passed away, largely due to the cost-of-living crisis, increased rents and mortgage rates and lack of savings.

The research estimates the average baseline financial impact of the death of a family breadwinner across England, Scotland and Wales would be £195,000 over the course of 10 years. Depending upon where you are in the UK, this may be a low estimate.

If one adult partner in a family dies prematurely, the impact can be huge on the surviving partner – not just emotionally but also financially – and they may be unable to continue their previous standard of living. This estimation is just a starting point and covers the most basic costs such as essential household spending and mortgage payments.

For many, the reality may be much higher in order to cope with additional expenses of running a family.

Add in that some of your clients are going to be business owners. What would be the impact on the business if they died? Have you recommended key-man insurance, have you discussed relevant life cover, should you think about income protection? Have you considered discussing implementing an employee benefits package with these clients?

All these are questions that you need to consider for your whole team. Compliance Matters UK Limited can help you construct a series of workshops to give your advisers the tools to have these conversations with your clients.

FCA confirms plan to protect access to cash for consumers and small businesses

In a press release, the FCA has stated that banks and building societies will need to weigh up if local communities lack access to cash services, like branches and ATMs, and plug significant gaps, under new rules.

From 18th September, banks and building societies will need to:

assess cash access and understand if additional services are needed, when changes are being made to local services;
respond to local residents, community organisations and representative groups, who will be able to request an assessment of whether there are gaps in local cash access;
deliver reasonable additional cash services, where significant gaps are found; and
keep facilities, including bank branches and ATMs, open until any additional cash services identified are available.

These new rules are contained in Policy Statement PS24/8 in which 14 designated banks will be required to assess and fill gaps or potential gaps in cash access provision.

Current FCA data shows that:

97.4% of the UK urban population are currently within one mile of a free-to-use cash access point offering deposits;
98.2% of the UK rural population are currently within three miles of a free-to-use cash access point offering deposits; and
the number of brick-and-mortar branches of the larger bank and building societies providing cash services fell by 210 branches, a decrease of 4.7%. This particularly affected the east and northeast of England and Yorkshire & The Humber.

Whilst not directly impacting our firms, access to face-to-face banking may impact our clients and as part of the consumer support outcome of the Consumer Duty you may want to keep an eye on local banking provision in your area.

FCA calls on firms to improve treatment of politically exposed persons (PEPs)

In a press release the FCA has told financial firms – including banks, payment firms and lenders – to do more to ensure parliamentarians, senior public servants and their families are not treated unfairly.

Under legislation adopted by Parliament, financial firms are required to do extra checks on so-called politically exposed persons (PEPs). This follows global standards set by the international Financial Action Task Force (FATF) and implemented by more than 200 jurisdictions.

There have been concerns about how firms in the UK are meeting these requirements and so the FCA has reviewed how firms are treating PEPs.

The FCA found that most firms in its review did not subject PEPs to excessive or disproportionate checks and none would deny them an account based on their status. However, all firms could improve. The regulator has told firms that they should:

ensure their definition of a PEP, family member or close associate is tightened to the minimum required by law and not go beyond that
review the status of PEPs and their associates promptly once they leave public office
communicate to PEPs effectively and in line with the Consumer Duty, explaining the reasons for their actions where possible
effectively consider the actual level of risk posed by the customer, and ensure that information requests are proportionate to those risks
improve the training offered to staff who deal with PEPs

Your firm is required to maintain a register of PEPs and review it periodically to ensure that is it current and that suitable CDD is maintained on each of the individuals on the register.

How can we help?

It is important that you have robust policies and procedures to ensure your firm delivers industry best practice and the four outcomes of the Consumer Duty. 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.

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