The New TPF Regime: Treating Politicians Fairly?

Engaging with Politically Exposed Persons (PEPs) has always posed an issue for regulated firms due to the view that because these individuals often have access to public funds, the risk for misuse is far higher than your typical investor.

While this may indicate a broadly negative view of politicians and their propensity for misbehaviour, this has not prevented PEPs from engaging in investments or taking on senior advisory roles once they have left office.

Or has it?

FCA review of PEP treatment

On 14 August, the Financial Conduct Authority (FCA) extended an invite to PEPs to share their experiences, including problems encountered by anyone caught under the PEP definition, when dealing with regulated firms. The UK regulator appears to be particularly interested in negative experiences.

This proactive approach forms part of the FCA’s review of firms’ treatment of PEPs, as bolstered by the newly passed Financial Services and Markets Act (2023), assessing how firms have applied the 2017 FCA guidance, and whether changes are needed to this guidance.

Review of bank account closures

This invitation is not the only request for information that the UK Regulator has issued recently. On 9 August, the FCA requested the largest banks and building societies to confirm by 25 August the number of customers who have been terminated, suspended, or denied services and the reason, in addition to any complaints received on the issue.

While the FCA has attempted to distance this information request to the PEP community outreach, the fact that they were responding to a call to action from the UK Chancellor, Jeremy Hunt, on the back of a highly publicised closure of a bank account (discussed below), points towards the two seemingly going hand in hand.

Notably, the FCA stated in the bank account closures request for information that: “this will include asking if accounts have been closed because of expressions of political or other opinions,” making it rather difficult to separate the two.

PEP issues come to light

Despite the attempt to separate the reviews, this recent FCA activity follows the resignation of Dame Alison Rose as CEO of NatWest following the highly publicised spat between Coutts bank, a subsidiary of NatWest, and Nigel Farage. Nigel Farage is the ex-leader of the UK Independence Party (UKIP) and Member of the European Parliament until Brexit (and perhaps one of the most divisive characters in recent UK politics). He had his bank account, which he purportedly maintained for at least ten years, closed by Coutts in July. Farage stated at the time that he was not given any reason for this closure.

A source at Coutts told the BBC the reason for the closure of Nigel Farage’s bank account was due to no longer meeting the minimum wealth threshold. Coutts’s published account criteria requires clients to have at least £1 million in investments or borrowing, or at least £3 million in savings – something Farage himself inadvertently admitted he did not have for the previous ten years.

However, following a subject access request by Farage, Coutts were found to have closed his account following a compilation of evidence over several months. The evidence led to reputational concerns of having him as a client as he “actively courts controversy”, plus alleged Russian connections, meaning the potential for financial crime.

It was then discovered that Dame Alison Rose was the source behind the statement to the BBC, which was not only a breach of client confidentiality, but amounted to the provision of incorrect information. This in turn lead to a discussion around “de-banking” and account closures based upon political views. Conservative Prime Minister Rishi Sunak quickly condemned such activity, stating that people should not be deprived of banking services because of their views. Jeremy Hunt then reached out directly to the FCA asking for an inquiry into de-banking.

It should be noted that Farage was offered an account by NatWest following the closure of his Coutts account which, presumably, he has rejected.

Impact

An individual’s right to have a bank account is not often put in the same bucket as an individual’s right to free speech. Financial institutions will often engage in periods of “de-risking,” choosing to exit from certain jurisdictions or sectors due to actual or perceived reputational risk based upon changing macroeconomic and geopolitical tides.

If anything, the Coutts vs Farage publicity match demonstrates the need for regulated firms to have clear policies and processes. Firms have the ability to set their own risk profiles and should do so based on clear criteria. Firms should also remember that risk profiles and appetite can change. The fact that the subject access request from Farage brought to light internal correspondence that Coutts probably would have preferred to remain private should also serve as a reminder that all correspondence should be considered public.

The UK regulator, of course, will continue its focus on protecting the everyday customer, aiming to understand the perspectives and concerns of PEPs, in addition to gathering any evidence of de-banking of politicians.

The FCA will report back on its PEP findings by June 2024 and firms should expect the 2017 FCA guidance on how to treat PEPs to be updated following this report. An initial assessment on the back of the account closure data is expected by mid-September of 2023.

While this story covers numerous financial and political aspects, it is a reminder of the importance of having a robust Know your Customer (KYC) program as part of an overall Anti-Money Laundering (AML) approach in addition to clear Treating Customers Fairly policies and procedures. Only with a well-rounded, tailored regulatory and compliance practice in place can firms avoid fines, sanctions, and reputational damage.

How we help

To help firms mitigate regulatory risks, keep pace with industry and jurisdictional best practices, and satisfy enquiries from prospective investors, we offer a range of advisory, outsourcing, and technology solutions. These include:

• KYC/CIP onboarding and AML screening. Our AML due diligence offerings are designed to assist your firm with implementing effective AML practices that meet industry best practices and comply with applicable local laws and regulations. Our team has extensive experience with a variety of firm profiles and strategies. We provide strategic support for key layers of your AML onboarding or deal-related reviews and screening – comprehensive support for firms who want us to take on the entire process.
• Our AML KYC/CIP technology solution provides automated, ongoing monitoring of over 90 sanctions and watchlists, politically exposed persons (PEPs), and more than 300 adverse media sources, as well as advanced name matching algorithms for both individuals and entities. Watch how it works here.
• To boost your knowledge about the UK’s AML regulations, sign up for our training courses on Money Laundering Reporting Officer: The Role and Responsibilities or Financial Crime Prevention, or speak to us to arrange a tailored training session. 

Contact us if you have any further questions, or to find out how ACA can help your firm meet your regulatory requirements.