Enhancements to the FCA's Financial Crime Guide: PS24/17 Updates

The 29th of November 2024, the Financial Conduct Authority (FCA) published Policy Statement PS24/17, which introduced significant updates to its Financial Crime Guide (FCG). These revisions followed a consultation period launched in April 2024 (CP24/9) and were driven by the FCA’s ongoing commitment to ensuring that firms possess robust systems and controls to counter financial crime effectively. The updated guide reflects the latest regulatory insights and industry developments, offering enhanced guidance across several critical areas, including sanctions, proliferation financing, transaction monitoring, cryptoasset businesses, and Consumer Duty obligations.

The Financial Crime Guide serves as a practical resource for regulated firms, detailing best practices for identifying and mitigating financial crime risks. Its primary objectives are to provide clarity on regulatory expectations, assist firms in evaluating the adequacy of their current systems, and guide the remediation of deficiencies. The changes outlined in PS24/17 are aligned with the FCA’s strategic priorities for 2022-2025, which emphasise a proactive, data-led approach to supervision. By addressing feedback from stakeholders, the FCA aims to ensure the guide remains a valuable tool for firms to navigate the complex landscape of financial crime prevention.

Overview of the Key Changes

Sanctions

The updates to the sanctions chapter reflect the evolving geopolitical environment, particularly in light of sanctions-related developments following Russia’s invasion of Ukraine in 2022. The revised guidance includes:

• Senior Management Accountability: Clearer guidance on the responsibilities of senior management in overseeing sanctions compliance, emphasising accountability for failures in systems and controls.
• Reporting Obligations: Enhanced clarity on when and how firms should report suspected sanctions breaches, aligned with the Office of Financial Sanctions Implementation (OFSI).
• Manual vs. Automated Screening: Detailed differentiation between manual and automated sanctions screening processes, with examples of good practices for both approaches.
• Self-assessment Tools: Firms are encouraged to utilise self-assessment tools to regularly evaluate the effectiveness of their sanctions systems and identify areas for improvement.

The FCA has also updated terminology to ensure consistency and clarity, such as distinguishing between “sanctioned jurisdictions” and “sanctioned targets.” These changes aim to help firms develop more nuanced and effective sanctions compliance frameworks.

Proliferation Financing (PF)

Proliferation financing, which involves funding the development or acquisition of weapons of mass destruction, has been a growing area of regulatory concern. The revised guide integrates PF into its broader framework for financial crime risk management. Key updates include:

• Mandatory Risk Assessments: Explicit inclusion of PF risk assessments as required under the Money Laundering Regulations (MLRs) 2017, ensuring firms address this critical area.
• Case Studies and Examples: Inclusion of illustrative scenarios to highlight effective PF risk management practices, helping firms contextualise their compliance efforts.
• Integration with Sanctions Guidance: While PF is closely tied to sanctions compliance, the guide provides specific references to regulatory requirements, avoiding unnecessary overlap while emphasising the interconnected nature of these risks.

Transaction Monitoring (TM)

The transaction monitoring section has been significantly enhanced to reflect advancements in technology and supervisory expectations. Major updates include:

• Incorporation of AI and Machine Learning: Guidance on leveraging artificial intelligence and machine learning tools to improve the accuracy and efficiency of transaction monitoring systems. Examples highlight how these technologies can reduce false positives and detect complex patterns of suspicious activity.
• Tailored Approaches: Emphasis on tailoring transaction monitoring systems to reflect the specific risk profiles of firms and their customers, rather than relying on generic, one-size-fits-all solutions.
• Data and Governance: Firms are advised to maintain robust records of how transaction monitoring systems are configured, including details of training data and adjustment processes, to ensure accountability and audit-ability.
• Case Studies: Real-world examples of both effective and deficient transaction monitoring practices, including a detailed case study of significant failings at a major financial institution.

Cryptoasset Businesses

Acknowledging the growing importance of cryptoassets, the guide now explicitly includes firms registered under the MLRs for anti-money laundering (AML) and counter-terrorist financing (CTF) purposes. Key elements of this update include:

• Risk Assessment: Guidance on addressing risks associated with anonymity-enhanced cryptocurrencies, such as privacy coins, mixers, and tumblers.
• Blockchain Analytics: Firms are encouraged to incorporate blockchain analytics tools to enhance transparency and detect suspicious activities effectively.
• Sector-Specific Examples: Practical examples tailored to the unique challenges of cryptoasset businesses, such as managing risks associated with self-hosted wallets and decentralised finance (DeFi) platforms.

The FCA’s approach remains sector-agnostic while recognising the distinct characteristics and risks of cryptoasset markets.

Consumer Duty

The incorporation of Consumer Duty provisions into the Financial Crime Guide represents a significant step toward aligning financial crime obligations with broader consumer protection goals. Highlights include:

• Balancing Obligations: Firms are guided on how to balance AML and CTF measures with the need to deliver positive outcomes for retail customers, particularly in cases involving vulnerable individuals.
• Customer Journey Considerations: Recommendations for integrating Consumer Duty principles into onboarding, due diligence, and customer support processes to mitigate harm and enhance trust.
• Regulatory Cross-References: Clear links to the FCA’s broader Consumer Duty guidance, ensuring firms understand their obligations under both regulatory frameworks.

Consequential Changes and Case Studies

To enhance the guide’s usability and relevance, the FCA has made several additional updates:

• Updated References: Replacement of outdated references to European Union regulations with current UK-specific regulatory frameworks.
• Enhanced Case Studies: Introduction of detailed scenarios illustrating both successful and deficient practices in areas such as AML controls, transaction monitoring, and sanctions compliance.
• Functional Links: Ensuring all web links within the guide are active and lead to relevant resources, facilitating easier access to supporting materials.

Implications for Firms

The updated Financial Crime Guide requires firms to undertake a comprehensive review of their systems and controls to ensure alignment with the revised guidance. Key steps include:

• Policy Revisions: Updating internal policies and procedures to reflect new regulatory expectations.
• Training Programs: Providing targeted training for staff on the updated guidance, particularly in areas such as transaction monitoring and sanctions compliance.
• Technology Enhancements: Implementing advanced tools, such as AI-driven transaction monitoring systems and blockchain analytics, to address evolving risks.
• Governance Improvements: Strengthening governance frameworks to ensure senior management accountability and effective oversight of financial crime compliance efforts.

Failure to implement these changes could result in regulatory action, including fines and reputational damage. However, firms that proactively adopt the guidance can enhance their resilience against financial crime and build greater trust with consumers and stakeholders.

Feedback and Future Directions

The consultation process for CP24/9 received generally positive feedback, with firms appreciating the enhanced clarity and practicality of the updates. Suggestions for future iterations include:

• Emerging Fraud Typologies: Expanding guidance on fraud prevention, particularly concerning authorised push payment (APP) scams and synthetic identity fraud.
• Advanced Technologies: Further exploration of AI and machine learning applications in financial crime prevention, including best practices for safe and effective implementation.
• Politically Exposed Persons (PEPs): Additional guidance on the treatment of domestic and international PEPs, reflecting recent regulatory developments.

The FCA remains committed to refining the guide in response to industry feedback and evolving risks. Future updates will likely address these emerging challenges, ensuring the guide remains a vital resource for firms navigating the complex landscape of financial crime prevention.

The updates to the FCA’s Financial Crime Guide reflect a proactive approach to addressing the challenges posed by evolving financial crime risks. Firms are encouraged to engage with the updated guidance, not only to achieve compliance but also to contribute to a more secure and trustworthy financial system.

As the regulatory landscape continues to evolve, the FCA’s commitment to refining its guidance will play a crucial role in supporting firms and protecting consumers. The updated Financial Crime Guide is a testament to this commitment, providing a robust framework for combating financial crime in an increasingly complex and dynamic environment.