The UK’s Financial Conduct Authority seeks to expand the scope of financial crime reporting requirements

On 24 August 2020, the Financial Conduct Authority (the “FCA”) published a consultation paper, CP20/17 Extension of Annual Financial Crime Reporting Obligation (the “Consultation Paper”).

The Consultation Paper outlines a proposal to extend the obligation to report information under the current annual financial crime reporting regime (“REP-CRIM”) to a greater number of regulated firms. The proposals extend the REP-CRIM requirement to firms which the FCA considers pose a higher money laundering risk, including cryptoasset firms and certain regulated insurers not covered under the existing REP-CRIM regime.

Existing REP-CRIM requirements

The FCA published their initial consultation document on the REP-CRIM requirements in December 2015, culminating in a Policy Statement outlining the finalised requirements in July 2016 and the coming into force of the REP-CRIM requirements on 31 December 2016.

The REP-CRIM information requirement was intended to support the broader ambitions of the FCA’s data strategy, first published in 2013, to improve supervision of firms through the implementation of a data-led approach. The REP-CRIM regime was also intended to improve firms’ money laundering systems and controls, and support the overall integrity of the UK financial system. The REP-CRIM requirements have since been amended to align with the Money Laundering Regulations 2017 (the “MLRs”) and with recent guidance in relation to Politically Exposed Persons (“PEPs”).

Currently, firms that that carry on certain activities and that have an annual revenue of £5 million or more are required to submit a REP-CRIM on annual basis. The number of firms currently subject to REP-CRIM is currently around 2,500 of the 23,000 firms supervised by the FCA under the Money Laundering Regulations 2017 (“MLRs”).

The detailed reporting requirements for the REP-CRIM return are laid out in Annex 42AR, Chapter 16 of the FCA’s Supervision Manual (“SUP”) and are comprised of five main categories:

1. Operating jurisdictions: where the firm operates, and which of these have been deemed “high risk” from a financial crime perspective;
2. Customer information: the geographical location of customers, including, in particular, any PEPs or others deemed “high risk”;
3. Compliance information: the number of suspicious activity reports made to the National Crime Agency during the reporting period and the number of staff employed in financial crime roles;
4. Sanctions-specific information: whether the firm uses automated systems to screen customers against sanctions lists, and how many sanctions-related alerts were reported during the return period; and
5. Fraud: the top three most prevalent frauds which the firm feels the FCA should be aware of.

Proposed changes to REP-CRIM requirements

The Consultation Paper proposes the extension of the REP-CRIM reporting requirement to a wider set of firms, which the FCA anticipates will bring an additional 4,500 firms within scope. The proposals are intended to bring those firms now included in the scope of the MLRs (since the introduction of the MLRs 2017) into the remit of the REP-CRIM requirements.

The FCA had stated in previous Policy Statements and proposals that such an expansion was likely and notes in the Consultation Paper that the proposals are in-line with the UK Government’s ‘Economic Crime Plan, 2019 to 2022’ published last year (for an analysis of the UK Economic Crime Plan please see Mayer Brown’s August 2019 article here).

The additional firms brought into the scope of the REP-CRIM requirements are those that the FCA considers have a higher money laundering risk, including:

• all authorised firms under the Financial Services and Markets Act 2000 that are within the scope of the MLRs and that hold client money or assets or that carry on an activity that the FCA considers to be posing a higher money laundering risk;
• all payment institutions except those that only carry out money remittance, account information services or are EEA authorised payment institutions;
• all electronic money institutions;
• all multilateral trading facilities and organised trading facilities; and
• all cryptoasset exchange providers and custodian wallet providers.

Under the new proposals, firms within scope will need to submit REP-CRIM returns irrespective of their total revenue. It is anticipated that timing of reporting will remain unchanged; firms will still be required to submit REP-CRIM information within 60 business days of their accounting reference date. For all firms except cryptoasset firms, the FCA propose that the new rules will apply from their next accounting reference date 12 months after any FCA rules are made.

For cryptoasset firms, the proposal states that the new rules will apply from the accounting reference date following 10 January 2022. As part of measures bought in by the EU Fifth Money Laundering Directive, cryptoasset firms are now required to register with the FCA by 10 January 2021 (the cut-off point for the submission of applications for such registration was 30 June 2020). The later date proposed by the Consultation Paper is therefore to allow cryptoasset firms sufficient time to prepare for REP-CRIM requirements following registration.

The vast majority of firms currently subject to REP-CRIM are unaffected by the FCA’s proposals, with the primary proposed change for existing firms being the removal of firms conducting activities which fall under the categories of: i) ‘home finance mediation’, or ii) ‘making arrangements with a view to transactions in investments’. The FCA considers such activities to be outside the scope of the MLRs. Assuming the current proposals are adopted in full, firms undertaking such activities will no longer be required to submit REP-CRIM returns.

Responding to the consultation

The consultation process closes on 23 November 2020, by which time firms are asked to submit their comments to the FCA for consideration. The Consultation Paper states that any such feedback will be considered and a final Policy Statement published by end of the first quarter next year. Based on the previous timeframes for the implementation of similar amendments, it is possible that the changes will therefore come into force towards the end of 2021.

Observations

The aim of the amendments proposed in the Consultation Paper are two-fold: i) to allow the FCA to capture greater quantities and more detailed data in relation to the types of financial crime issues firms face and thereby improve supervision, and ii) to improve the money laundering and financial crime systems and controls of all firms, irrespective of whether they are required to submit REP-CRIM returns.

These amendments reflect the increasing focus of regulators, not just in the UK but also elsewhere, on data-driven regulation and the importance they place on regulated firms to provide that data, and also to analyse it themselves to detect and report wrongdoing. The amendments also reflect the very strong and widening regulatory focus on financial crime, and especially on anti-money laundering controls, as a way of detecting and preventing criminal behaviour, not only through traditional fully regulated firms, but also firms in emerging areas of regulation which might perhaps only be subject to lighter forms of regulation, such as the MLRs.

We are expecting to see even more compliance and law enforcement activity in this area in the near future. The way in which smaller firms in industries which the FCA considers high risk (for example some cryptoasset and payment services providers) deal with the amendments and the wider trends they represent will be of particular interest. For some of them, this level of regulatory attention will be a new experience and the ones who move fastest to introduce robust, effective and modern compliance mechanisms may find that this provides them with an advantage over their competitors which they have not had before.