Compliance Digest - 3rd May 2024

This week I launched my new website.  Please visit www.compliancematters.co.uk to see what has changed.  Watch for more developments to my proposition in the next few weeks. 

It has been quiet on the regulation front this week, although there has been a lot of commentary regarding the FCA Consultation Paper CP24/2 about changes to the Enforcement Guide and publicising enforcement investigations.  I will review the positive and negative reactions to give an overview next week. 

I cover three topics in detail this week:

• The publication of the FCA aggregate complaints data for H2 2023

• Sanctions screening

• Consumer Duty Board Reports

FCA Aggregate complaints data: H2 2023

The FCA publishes complaints data every half-year.  The most recent data provides an overview of financial services firms' complaints reported to the FCA during H2 2023 (1 July to 31 December 2023), including the latest trends and analysis by product group.  The link above provides the detail and sortable tables that illustrate the key findings taken from the RMAR complaints data from firms.

The FCA collects complaints data from firms to enable it to monitor:

• the number of complaints that firms receive

• how this changes over time

• which products or services people have complained about the most

The FCA uses the data to help assess how well firms are treating their customers and how their performance changes over time.  It also uses the data to guide its work in supervising firms and markets, and to highlight potential concerns with products.

Now might be a good time to review your complaints process and procedure to ensure that it meets best practice and the requirements of the Consumer Duty.  I can provide an independent review and give you the reassurance that your processes meet with best practice.

Sanctions screening

Many firms use an online electronic solution to identify and verify their clients.  Some of these include ongoing screening against PEP and sanctions registers.  In the UK, the Office of Financial Sanctions (or OFSI) maintains the consolidated list of asset freeze targets.  OFSI is part of HM Treasury.

AML Singapore has identified nine deficiencies around sanctions screening.  You might want to compare your firm’s process against these.

1. Inadequate Evidence

• Deficiency: Failure to maintain records of sanction screenings carried out.

• Solution: Use sanction screening software that maintains records of sanctions screening carried out on a fresh and ongoing basis.
  

2. No Ongoing Sanctions Screening

• Deficiency: Failure in screening of individuals and entities against the latest and relevant sanctions lists on an ongoing basis

• Solution: Implement a screening software that supports scheduled automated screening of customers on a daily basis, and the feature is turned ON.
  

3. Failure to Conduct On-time Screening

• Deficiency: No sanctions screening is conducted before customer onboarding or before establishing a business relationship.

• Solution: Make on-time sanctions screening a part of your AML compliance program and train front-line employees accordingly.
  

4. Sanctions List Data Quality

• Deficiency: Conducting sanctions screening through unreliable or secondary sources not issued by authority.

• Solution: Only rely upon the sanctions list issued by the competent authority.
  

5. Inadequate Case Management

• Deficiency: Inadequate management of Sanctions alert data, including:

  • Alert logs

  • Evidence of screening

  • Reasons for Closing alerts and the approval process

  • Inadequate due diligence records,

  • Key attributes of the sanctioned person include Aliases, nationality, etc.

• Solution: Use AML software that automates case management and covers all the required information.
  

6. Incorrect Configuration of Screening Software

• Deficiency: The sanction screening software is not aligned with the risk-based approach taken by the firm, and not all relevant sanctions lists are used while screening a customer.

• Solution: Take a professional software implementation service to ensure that the screening software is configured correctly to consider all types of sanctions and watchlists.
  

7. Missing out on Partial Name Matches

• Deficiency: Neglecting partial name matches found during sanctions screening.

• Solution: Check for various attributes such as date of birth and aliases to confirm or eliminate partial name matches and submit a Suspicious Transaction Report if there’s still no conclusion.
  

8. Lack of Adequate Employee Training

• Deficiency: Employees are not provided with the adequate sanctioning screening procedure and actions needed based on screening.

• Solution: In-depth sanctions screening training must be conducted under the guidance of expert AML professionals.
  

9. False Positives Leading to Inefficiency

• Deficiency: Non-sanctioned individuals and entities are flagged, leading to unnecessary efforts in alert remediation.

• Solution: Compare the right factors to quickly detect false positives.

Consumer Duty Board Reports

The FCA requires each firm’s Board or Governing Body to review and approve an assessment of whether the firm is delivering good outcomes for its customers that are consistent with the Consumer Duty.  The requirement is for this review to take place at least annually, with firms required to produce and review their first report by 31st July 2024.  Firms should be considering the requirements of the assessment and working to tailor their approach to ensure all of these are met.

There is a good argument that these reports should be produced in the First Line by, for example the Chief Operating Officer, with oversight from Compliance as the Second Line.  Firms should already have the MI in place to be able to start compiling the report.

The reports are internal Governance documents, but firms can expect the FCA to review a sample of these reports, and the report is likely to form part of supervisory discussions.  In addition to the report, MI to substantiate the conclusions of the report must be included.  This will allow the Board to approve the report and the proposed action plan and business strategy for the firm to continue to deliver the outcomes of the Consumer Duty

What should be included in the Consumer Duty Board Report?  This is summarised in PRIN 2A.8 which covers governance and culture, and PRIN 2A 9 which covers monitoring of consumer outcomes.  PRIN 2A can be accessed here.

A review of the firm’s performance against the customer outcomes

The business will need to provide the Board with sufficient information to allow it to accurately review the outcomes being delivered to retail customers.  For example, how has the business performed in preventing foreseeable harm?  What evidence is there that customers with characteristics of vulnerability are receiving good outcomes?

Taking a critical view of the firm’s progress is vital.  It is important that firms not only detail positive outcomes which their clients are receiving, but also evidence any poor outcomes being received, and any other gaps that are identified.  It is equally important for firms to be open and honest about these challenges, as that then provides the opportunity to demonstrate that they are being captured, and what is going to be done about it.  The FCA rarely expects perfection in compliance and will always look favourably on a firm that is able to acknowledge concerns, with the key being that the firm has a clear action plan to remediate any issues or shortcomings.

This is the first report, firms should detail the initial outcomes that their clients were receiving prior to implementing the Consumer Duty in July 2023.  These should have formed part of the Implementation Plan and assessment, with some explanation of the changes identified to improve those outcomes and comply with the Consumer Duty from 31 July 2023.  These should then feed into the core aspect of the report; providing the governing body with the evidence and demonstrating the results of the ongoing monitoring that the firm has undertaken in the period to assess the outcomes that its clients are currently receiving.

Assessing business strategy

In the report, firms also need to demonstrate an assessment of their current and forward-looking business strategy and whether it is consistent with acting to deliver good outcomes for retail clients under the Consumer Duty.  The report should answer the question: how is your firm ensuring that what you are doing is customer focused?

This is also an opportunity to demonstrate that the Consumer Duty has been embedded into the firm's Governance and into its culture.  While it is a compliance requirement to consider this aspect of the assessment, it is also good practice to show that good customer outcomes are an integral part of any strategic thinking. 

It is for the business to demonstrate that the delivery of good customer outcomes is at the heart of how the firm is managed, and for Compliance to provide the 2nd line oversight and assurance.

This graphic might be useful:

A key part of ensuring compliance with the Consumer Duty will revolve around each firm having sufficient governance in place.  The firm's Governing Body is ultimately responsible for signing off compliance, with the annual assessment being the tool to do so.  It is therefore essential that the Governing Body's role is sufficiently defined.

It is important to note that the FCA has emphasised the expectation that, where possible, there should be a distinct differentiation between Executive Committees and decision makers, and the Governing Body regarding the Consumer Duty.  The executives own the delivery of the Consumer Duty whilst the Governing Body provides review and challenge, setting the strategy and assuring the business that it is delivering outcomes in line with the Duty.

If you need assistance drafting your report to the Governing Body, please contact me.

Ian Ashleigh