In more detail

What is the background to this review?

The treatment of PEPs by UK banks gained significant press attention after a politician (Nigel Farage) gained evidence demonstrating that a private bank (Coutts) took action to offboard him as a result of his political values. This ultimately led to wider questions over whether banks were treating politically exposed customers fairly, especially in relation to domestic PEPs. The FCA subsequently chose to take action as a result of concerns that PEPs may be being treated inequitably by banks and other financial services firms. We are aware, in particular, that the FCA is investigating PEP-related controls applied by certain major institutions in this respect.

Findings of the review

The FCA's findings are detailed, but some of the key points arising from the review are as follows:

• Some financial institutions were adopting definitions for PEPs and "RCAs" (i.e., relatives and close associates – in other words, individuals who are closely associated with a PEP) that are wider than those set out in applicable regulations.
• Some institutions did not have effective arrangements to assess if the PEP classification was still appropriate after the PEP had left public office. This includes a lack of suitable policies and procedures to appropriately review the classification after the individual ended their public function, as well as issues with timely declassification.
• A few firms did not consider the customer's actual risk in their assessment and rating, and did not give a clear rationale for their risk rating. In some instances the FCA found that firms failed to provide a clear rationale or narrative explaining the customer's risk rating in the customer files.
• Firms needed to improve the clarity and detail of their communications with PEP and RCA customers. Some firms had inadequate processes for customer information requests and did not make it sufficiently clear to customers why they were being asked for additional information (for example, referring simply to the need to satisfy regulatory obligations). In other instances some firms did not adequately communicate with customers about account rejections or closures.
• Some firms needed to update their policies to reflect recent UK regulatory amendments to treat UK PEPs and RCAs as having a lower level of risk than a foreign PEP, unless they have other risk factors.

What action should family offices take?

We have found that – despite the increasingly significant role that family offices play in the financial markets – their structure and risk levels can be poorly understood by others in the market. In particular, banks and other industry stakeholders (including supervisory authorities) do not always assess risk levels inherent in family offices, or their UBOs, on a proportionate basis. The FCA's guidance is a helpful reminder that, whilst financial institutions are required to view effective AML and KYC controls as business critical, they must ensure that these controls are applied in a proportionate manner. In particular, UBOs who may be classified as PEPs and find that banks are attaching a disproportionate level of risk to this status should work with their advisers to ensure that the following points are addressed:

• Individuals should ensure that they are clearly in fact within scope of the definition of a PEP (or a close associate / family member of a PEP). The definition applied by the financial institution should simply be "the minimum required by law" (as per the FCA's guidance) and should not go beyond this.
• The financial institution should clearly justify why it is making any data requests, particularly more intrusive requests. This reflects FCA guidance that firms should ensure that communication with customers is clear and effective when requesting information (i.e., so that PEPs and connected persons can understand what information is being sought and why the requests are being made).
• It should be possible to push back on data requests that are clearly disproportionate; the FCA has noted, for example, that financial institutions should consider the actual level of risk posed by a client, and ensure that information requests are proportionate to those risks.
• If a UBO has previously been categorised as a PEP but has since left public office, or they believe that there has been some other relevant change to their status, they should ensure that any such change in their status is communicated to relevant financial institutions.
• If a financial institution is unwilling to provide financial services either to an individual it has classified as a PEP or to that individual's investment vehicle, this may be open to challenge more generally given the FCA's comments.
• Finally, jurisdictional factors may be relevant, depending on where the UBO and the financial institution itself are based (as noted above, UK PEPs may be treated by UK institutions as lower risk).

Conclusion

Family offices and their UBOs can continue to expect financial institutions to apply enhanced levels of due diligence both during onboarding processes and periodically throughout the relationship. Nonetheless, family offices should work with their external advisers to ensure that restrictions and due diligence requests have a clear basis in applicable regulations across all jurisdictions. The FCA's comments demonstrate that there is room to challenge disproportionate or intrusive requests, or outright refusals to provide services to PEPs and their connected persons.