Nigel Farage is back on our front pages. The coverage is not related to Brexit or GB News, but to a niche financial crime control that few people outside the financial services sector have ever heard of. Farage had his bank account at Coutts closed, largely due to his status as a politically exposed person (PEP) and his political views. Since this became public, press coverage of PEP controls has been endless (and often ill-informed). In this article, I address some of the challenges we are seeing in the payments space associated with PEPs and de-banking, and our view on what the future may hold.
At the end of June, Farage received a letter from Coutts confirming that his account would be closed. Farage posted a six-minute video on Twitter publicising the closure, claiming that it was primarily driven by his PEP status. In a second video, he added that he had been rejected by nine other banks. In a saga that involved the BBC’s false reporting and the resignation of NatWest’s CEO, ultimately the issue has been picked up by senior Government figures. The Chancellor Jeremy Hunt has called for an inquiry from the Financial Conduct Authority (FCA) into the ‘de-banking’ of politicians.
PEPs have a higher risk exposure to financial crime given their status and access, which increases the risk of bribery and corruption. Money laundering regulation requires firms to identify PEPs and conduct enhanced due diligence (particularly on their source of wealth and funds) to mitigate this risk. PEPs themselves have different levels of risk, depending on factors such as their seniority and jurisdiction, and this must be considered when deciding whether a PEP is within or outside of risk appetite. This could also include reputational risks linked to views or actions.
We have seen various approaches to PEPs in the industry. For more mature firms with a clear risk appetite and a defined risk assessment methodology, we see clear distinctions between (for example) domestic PEPs with lower seniority versus foreign PEPs in higher risk jurisdictions. In these cases, the firm decides what is within or outside its risk appetite depending on whether its control framework can manage any increased risks. The firm can onboard lower risk PEPs, with appropriate controls, and perhaps higher risk PEPs may sit outside its risk appetite.
However, we also see firms with a very low risk appetite stipulating a blanket ‘no’ to onboarding any PEP – no matter the risk level. In these instances, the low-risk appetite is often driven by two factors: 1) the immaturity of the firm’s control framework, and/or 2) a low-risk appetite set by banking partners. On the first point, if a firm does not have a mature framework to manage the risk, it should have the freedom to reject the risk – however, this decision must be nuanced, balanced, and documented instead of a blanket ‘no’. On the second point, we often see a lack of flexibility or nuance in the risk appetite set by banking partners in part due to the immaturity of the frameworks they are engaging with or simply a blanket de-risking exercise due to current and increased regulatory oversight in this space. This is something that should be considered as the principal / agent or distributor model develops.
Yet, the Farage debate misses the point on wider de-risking issues. There are many customer segments that have long since experienced de-risking that are being sidelined by this focus on PEPs. For instance, individuals born in high-risk jurisdictions or certain charities. Not having access to bank accounts is stressful, costly and a fundamental blocker to modern life. In the case of Farage, he was offered a replacement account at NatWest, whilst many of these individuals simply cannot access the banking system.
The FCA published research into de-risking back in 2016 – these issues are nothing new.[1] However, following the Chancellor’s letter, the FCA has published a specific request for information from banks on the number of account closures because of expressions of political or other opinions.[2] The direction of travel is clear – the FCA will be investigating and likely publishing more guidance on how to deal with PEP risk and avoid blanket de-banking.
This will ultimately impact payments firms, who need to be prepared to flex their risk appetite in terms of PEPs and have open conversations with banking partners about how to address PEP risk in a more nuanced way. This will require a more refined risk appetite and risk assessment matrix, as well as ensuring control frameworks are set up to mitigate PEP risk.
However, I would encourage firms to think about de-risking more holistically – not just in terms of PEPs. Given the FCA’s focus on the Consumer Duty and vulnerable customers, the future will also require a more nuanced and thoughtful approach to other customer areas.
Thistle Initiatives has helped firms reset their risk appetite, assure their controls, and build appropriate due diligence or monitoring frameworks in higher risk situations, so that you are best placed to manage your risks.
Visit thistleinitiatives.co.uk for more information and reach out if you have any questions or want to continue the conversation! To arrange a free consultation with our expert financial crime team, get in touch by calling 0207 436 0630 or email me at Jessica.cath@thistleinitiatives.co.uk.
By Jessica Cath, Head of Financial Crime at Thistle Initiatives.
[1] https://www.fca.org.uk/news/news-stories/fca-research-issue-de-risking
[2] https://www.fca.org.uk/news/news-stories/we-request-data-banks-account-closures
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