HM Treasury has published it’s response and call for further information on its Anti-money laundering supervisory regime consultation here. This response from the government mainly explores how the inconsistencies in approach and effectiveness of the AML supervision provided by 22 professional bodies which supervise their respective industry sectors (e.g. accounting, gambling and legal professional bodies). The two issues of relevance for credit unions are:

  • Guidance – HM Treasury will review both of the FCA Financial Crime Guide and the guidance provided by the JMLSG to ensure that these two pieces of guidance complement each other, as part of process of updating the guidance reflect the implementation of the Fourth Money Laundering Directive. The government will not, as originally considered, merge these two documents.
  • FCA Approach to supervision – The government has agrees that the FCA should direct more attention to smaller financial firms for AML supervision, including more onsite visits. However, it has not been explicitly stated that this approach would be extended as far as credit unions.

Introduction

The HM Treasury has launched a call for information on the supervisory regime for Anti-money Laundering (AML) and Counter-Financing of Terrorism (CFT) regulations across the UK. The AML/CTF money laundering supervisor for credit unions (and the rest of the financial services industry) is the Financial Conduct Authority (FCA), whilst other sectors such as the accounting, legal and gambling professions have a range of different supervisors. Certain sectors such as accounting have several industry supervisors, and often professional bodies – which are approved by the Treasury – perform the supervisory function rather than a independent regulator like the FCA. The full list of AML/CTF supervisors for the UK can be found on the .Gov website here.

This call for information follows the national risk assessment of money laundering and terrorist financing published October 2015 which found that the effectiveness of the AML/CTF supervisory regime was inconsistent and that there was room for improvements across the board. Whilst this call for information contains no direct proposals to amend the supervisory regime it does indicate the areas of interest for the government which are outlined in the briefing below.

Key areas

  • Risk-identification methodology – There are a number of different supervisors covering the various types of business subject to AML/CTF regulation such as the Financial Conduct Authority (FCA) which supervises credit unions. As supervisors have generally developed their own methodologies for assessing risk independently this has resulted in non-comparable and potentially contradictory definitions of material risk. Whilst this is more relevant to other business areas such as accountancy which has multiple overlapping supervisors and thus may be a source of conflict, the government is considering whether or not this should be addressed through a single methodology with sector-specific modifications.
  • Supervisor’s accountability – Whilst the FCA as a statutory body is accountable to parliament other supervisors are professional bodies granted authority to supervise by HM Treasury (HMT). Whilst some professional bodies submit an annual return to HMT they are ultimately accountable to the same members they supervise. The government is considering whether a different mechanism for holding supervisors to account is required, such as a ‘supervisor’s supervisor’, a body that would assess the effectiveness of all supervisors with certain powers to take remedial action. The government is inviting opinions on whether this could be carried out by the treasury directly, an existing body such as the National Audit Office, or an entirely new body.
  • Penalties and enforcement – The government is considering harmonising the powers that supervisors have to penalise and take enforcement action against breaches of the AML/CTF regulations. Whilst the FCA has fairly extensive powers in this respect, unlike the HMRC, the FCA does not have the authority to instigate proceedings that are prosecuted by the Crown Prosecution Service (CPS). Therefore, the FCA could be granted further powers to punish breaches if the government decides to pursue harmonisation in this area.
  • Guidance – The AML/CTF guidance that credit unions use is currently split between the Joint Money Laundering Steering Group (JMLSG) guidance and the FCA’s financial crime guide. Responses to the national risk assessment review stated that the financial crime guide was unclear and inconsistent with the JMLSG guidance. The government are asking for opinions on whether one of the guides should be discontinued or whether the two guides should be merged. The government is also considering creating one single piece of guidance on the legal framework of the AML/CTF regime whilst sector bodies can develop guidance on compliance within that specific sector.
  • Transparency – The government is asking for information on whether or not supervisors should be required to publish details of their enforcement actions and strategy, perhaps as part of the existing annual report on supervisors. Whilst this transparency may lead to further accountability and sharing of best practices between supervisors, any openly recognised risks and vulnerabilities could also be exploited.
  • FCA’s approach to supervision – Respondents to the cutting red tape review suggested that the FCA’s approach is too compliance centric imposing burdensome procedures onto firms and customers that would not be required under a truly risk-based approach as the regulations prescribe. There were also questions raised around whether the FCA’s focus on the largest firms leads to smaller firms not receiving the scrutiny warranted. The government are inviting input on how financial institutions can be best encouraged to take a proportionate approach to their relationships with customers when complying with money laundering regulations.

Conclusion

This call for information will feed into a consultative process on the Money Laundering and Counter-Financing Terrorism supervisory regime. Credit unions that have any concerns around how money laundering is supervised or believe that the guidance provided could be improved are encouraged to get in touch with the ABCUL policy team. Annex 1 contains the list of questions the government has produced to stimulate responses but the call of information is not limited to those topics.

ABCUL – May 2016

Annex 1: List of questions

The most relevant questions for credit unions have been emboldened for quick reference.

1) Should the government address the issue of non-comparable risk assessment methodologies and if so, how? Should it work with supervisors to develop a single methodology, with appropriate sector-specific modification.

2) How should the government best support supervisors – and supervisors support each other – to link their risk-assessments to monitoring activities and to properly articulate how they do so?

3) Should the government monitor the identification and assessment of risks by the supervisors on an ongoing basis? Should the supervisors monitor each other’s identification and assessment of risks? How might this work?

4) Should smaller supervisors be encouraged to pool AML/CFT resources into a joint risk function and would this lead to efficiencies? If so, how should they be encouraged?

5) How should the ability of the supervisors and law enforcement agencies to share information on risks be improved?

6) To promote discussions between the supervisors, should attendance at the AMLSF and submission of an annual return to the Treasury be made compulsory for supervisors? How could the government ensure that this happened?

7) Could Money Laundering Advisory Committee (MLAC) have a greater role in driving improvements in the supervisory regime?

8) Should the government instigate a formal mechanism for assessing the effectiveness of all the supervisors AML/CFT activities with the power to compel action to address shortcomings? If so, should this be carried out by the Treasury directly, through another body such as the National Audit Office, or through creating a new body, perhaps along the same lines as the Legal Services Board which oversees legal services supervisors or the Financial Reporting Council which promotes high quality corporate governance and reporting? Are there other ways of ensuring effectiveness that should be considered?

9) Would an overarching body be able to add value by maintaining a more strategic view of the entire AML/CFT landscape and identifying cross-cutting issues which individual supervisors might struggle to identify? Should such a body have the authority to guide and compel the activities of the supervisors, up to and including the power to revoke approval for bodies to be supervisors?

10) Should the government seek to harmonise approaches to penalties and powers? For example, should supervisors have access to a certain minimum range of penalties and powers and what should these be? Should there be a common approach for deciding on penalties and calculating fines based on variables such as turnover that are scalable to the size of the business?

11) Should the government seek to establish a single standard for supervisors disciplinary and appeals functions?

12) Does the inability of some supervisors to directly compel attendance of relevant persons to answer questions or to enter premises reduce their ability to effectively supervise, or is liaison with law enforcement agencies an appropriate mechanism? If so, how could the government address this?

13) Should all supervisors have powers to compel supervised businesses to submit comprehensive and up-to-date information to aid risk assessment?

14) Is there a need for supervisors themselves to undergo training and/or continuous professional development? Is so, what form might this take and should it be government-recognised?

15) Is there a need for relevant persons in the supervised populations across all sectors to undergo training and/or continuous professional development to aid their understanding of AML/CFT issues?

16) What safeguards should be put in place to ensure that there is sufficient separation between the advocacy and AML/CFT supervisory functions in professional bodies? To what extent are appropriate safeguards already in place?

17) Should the government mandate the separation of representative and AML/CFT supervisory roles? What impacts might this have on the professional bodies themselves?

18) How does the UK approach to professional body supervision compare to other countries’ regimes?

19) How could inconsistencies between the JMLSG guidance and the FCA’s Financial Crime guide best be resolved? Should the two be merged? Or should one be discontinued and if so, which one and why?

20) What alternative system for approving guidance should be considered and what should the government’s role be? Is it important to maintain the principle of providing legal safe harbour to businesses that follow the guidance?

21) Should the government produce a single piece of guidance to help regulated businesses understand the intent and meaning of the Money Laundering Regulations, leaving the supervisors and industry bodies to issue specific guidance on how different sectors can comply? If so, would this industry guidance need to be Treasury approved? Should it be made clear that the supervised population is to follow the industry guidance?

22) Should supervisors be required to publish details of their enforcement actions and enforcement strategy, perhaps as part of the Treasury’s annual report on supervisors, or in their own reports? What are the benefits and risks in doing so?

23) Should the government publish more of the detail gathered by the annual supervisor’s report process? For example, sharing good practice or weaknesses across all supervisors?

24) Should supervisors be required to undertake thematic reviews of particular activities or sections of their supervised populations, as the FCA currently does? If so, how often should such reviews be undertaken?

25) What is the best way to facilitate intelligence sharing among supervisors and between supervisors and law enforcement? What safeguards should be imposed?

26) As one means of facilitating better sharing of intelligence among supervisors and between supervisors and law enforcement, could the government mandate that all supervisors should fulfil the conditions for, and become members of, a mechanism such as FIN-NET? Are there other suitable mechanisms, such as the Shared Intelligence System (also hosted by the FCA)?

27) Should the government require all supervisors to maintain registers of supervised businesses? If so, should these registers cover all registered businesses or just certain sectors? Should such registers be public? What are the likely costs and benefits of doing so?

28) How can credit and financial institutions best be encouraged to take a proportionate approach to their relationships with customers and avoid creating burdensome requirements not strictly required by the regulations?

29) Does failure of AML/CFT compliance pose a credible systemic financial stability risk? If so, does this mean that the FCA should devote more resource to the largest banks which have the greatest potential to have systemic effects?

30) How should the FCA address the perception from evidence submitted to the Cutting Red Tape Review that it is overly focused on process and ensure that its AML/CFT supervision is focused proportionately on firms which pose the greatest risk?

31) Is the number of supervisors in itself a barrier to effective and consistent supervision? Is so, how should the number be reduced and what number would allow a consistent approach?

32) If this is an issue, are there other ways to address it? For example, would supervisors within a single sector benefit from pooling their AML/CFT resources and establishing a joint supervisory function?