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FCA focus on Financial Crime

10th November 2016

FCA Financial Crime Conference 2016

The FCA Financial Crime Conference was held in London today during which a number of representatives from the Regulator gave speeches on tackling financial crime.

Andrew Bailey, Chief Executive of the FCA gave a speech entitled ‘Fighting Financial Crime – Looking Forward and Back’ that focused on the financial system from over the last decade, - from before the Global Financial Crisis – to discuss the difficulties with the aim of learning how to effectively work towards preventing financial crime in the future.

A Challenging Landscape

Mr Bailey advised that “over the last thirty years, there has been a progressive expansion of the scope of regulation to address the risks of financial crime.” And that this progressive expansion “reflects the development of strong norms in society about what is and is not acceptable in areas such as money laundering.”

It is not only society that has developed over that period, indeed the growth of global trade in goods and services as well as the movement of capital and funds across borders to help support that trade has created a much broader economic development globally than ever before.

Furthermore, there have been incredible leaps in technology, particularly in areas such as payments, that has “fundamentally changed the landscape”.

Whilst these many developments have benefited the global economy, they have also had side effect, which as Mr Bailey pointed out, the main one has been to increase the scope “both domestically and internationally, for financial crime to take place.”

Thus, it is these developments combined that “have created a very challenging landscape for preventing financial crime”

The Future of Fighting Financial Crime: Challenges

Since financial crime is constantly evolving, it is difficult to say the risk of it will ever be eradicated, however, the regulator promises to continue to “focus on tackling the risk it poses – to consumers, firms and the integrity if the financial system.”

Fighting financial crime, has, and as Mr Bailey informs, continues to be a high priority for the FCA, so that whatever the progress, the FCA does not intend to reduce their focus on financial crime. This is with particularly regard to the fact the level of public interest in ensuring financial services are clean and given that evolving risks exist.

So, with regard to the future challenges the FCA faces in fighting financial crime, Mr Bailey made it clear that:

It seems that one of the main challenges for the FCA is to establish rules and principles which can be applied via judgement in order to achieve sensible outcomes.

“financial crime will mutate and morph and it would be unwise to make statements to the effect that we have it beaten. But, there is a lot we are doing well and will continue to develop to tackle financial crime”.

Financial Crime Priorities - Effectiveness & Proportionality:

Rob Gruppetta, Head of the Financial Crime Department also gave a speech that focused on ‘Effectiveness and Proportionality: Our Financial Crime Priorities.

Whilst discussing the difficulty in balancing of the effects of increasing regulation vs the benefits of tackling financial crime he highlighted the following key messages:

Since the regulator has been given a job of ‘policing’ what those within the industry are doing to detect and prevent money laundering and financial crime, the FCA’s supervisory efforts are focused where they think the risks are higher – such as cross-border business with riskier countries and where wealthy politically-exposed persons are involved.

Mr Gruppetta also appealed for the industry to really consider how they think AMl processes and application of the rules can be improved and in doing so also asked some thought-provoking questions, such as “ is the criminal liability attached to the Money Laundering Reporting Officer role actually doing more harm than good – does it lead to overly conservative or defensive reporting which muddies the water for law enforcers?”

It will no doubt be interesting to hear what responses the industry might provide following the conference.

Also noted by Mr Gruppetta was a reminder that the new financial crime return will take effect next month. The data collected within the new return aims to help the FCA identify which firms are exposed to higher financial crime risk so that they can the focus their supervision accordingly –i.e. their application of a “risk-based approach” to AML supervision.

Mr Gruppetta also mentioned that the regulator has found over the course of the year a number of serious deficiencies within firms that and required substantial changes to be made.

Whilst they have often found a culture of ‘wanting to do the right thing’ some firms have struggled to translate this into effective execution. He pinpointed some of the common root causes being:

Both of which often leads to:

Mr Gruppetta also spoke about AML as a global issue reminding the industry that it is “important to work with our international colleagues.” In his speech entitled ‘Effectiveness of the AML regime in disrupting financial crime’ he provided the figure that in the UK alone, the social and economic costs of serious and organised crime have previously been assessed at £24bn.

From Mr Gruppetta’s speech, it seems that there is a “delicate balance between deterring criminals and terrorist organisations but also being proportionate, risk-based and fair to legitimate businesses.” The FCA stresses it is aware that the regime can be a ‘burden’ sometimes however the City Watchdog also wants to ensure a future is not created where procedural compliance costs undermine efforts to tackle real financial crime.

Nausicaa Delfas, the FCA’s Director of Specialist Supervision, gave the Closing Remarks for the Conference and summed up the message the FCA are trying to permeate:

“We all have a united goal. Fighting financial crime and making the UK’s financial system a hostile place for criminals to do business is a priority for all of us.

We want to work with you to achieve the best regime possible, we will use a risk-based approach to focus our resources where it’s needed the most, and we will be proportionate and fair when we take action.”

Next Steps for Firms:

Whilst the messages from the FCA sink in and industry participants revert with their opinions on how finance crime is being tackled, they should also be mindful that the government is preparing for the new Money Laundering Regulations (4MLD) soon and as a result next year in 2017, the FCA will have to update their ‘Financial Crime Guide for Firms’ that was published last April.

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Financial Crime

Due Diligence & Financial Crime

Comment from the FCA:

The FCA’s “role is adapting to meet the changing face of financial services in the UK. Consumers’ needs are becoming more diverse and complex, yet they are increasingly required to take more personal responsibility for their financial decisions. Technology is creating new opportunities, both for the types of services firms can provide and how they provide them.

And the number of firms and individuals which now come within our regulatory remit continues to grow. All of these issues are important when considering our response to financial crime.”

Andrew Bailey, FCA, November 2016

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