The Financial Conduct Authority (FCA), the UK’s principal financial regulator, sent a pointed “Dear CEO” letter on 16 March 2023. Austrlian RegTech company Arctic Intelligence commented on what this means.
Initially, the letter praised the competition and innovation witnessed in the payment sector. However, this recognition was soon overshadowed by grave concerns.
The FCA expressed worry about the inadequate control measures across numerous payment firms. These firms, it noted, posed an ‘unacceptable risk of harm’ to their customers and the broader financial system. Furthermore, the FCA highlighted that these risks were amplified by the prevailing economic hardship and the cost-of-living crisis.
While the communication was primarily targeted at e-money providers, money remittance services, and payment processors, the FCA’s message carried implications for a broader range of firms. Specifically, those firms registered or authorised under the Payment Services Regulations 2017 (“PSRs”) and the Electronic Money Regulations 2011 (“EMRs”), including Payment Institutions (“PIs”), Electronic Money Institutions (“EMIs”) and Registered Account Information Service Providers (“RAISPs”).
The FCA laid out three expectations for financial services firms: to ensure customer money safety, to prevent compromising the financial system integrity, and to meet customer needs by offering superior products and services, fostering competition and innovation, and implementing the FCA Consumer Duty.
While most financial institutions have dedicated substantial efforts to risk and compliance, the FCA flagged persisting gaps. Ensuring compliance has become critical to prevent exploitation by criminals and to safeguard society’s most vulnerable members. However, adapting to swift technological advancements, the emergence of digital currencies, the formulation of new laws, and the financial market’s relentless evolution has proved a colossal challenge. These factors complicate efforts to protect customers’ funds and manage Anti-Money Laundering (AML) compliance, even threatening some firms with failure.
The FCA has adopted a strategic approach from 2022-2025 to reduce and prevent financial crime, with its Outcome 2 – Firms do not compromise financial system integrity, aiming to ensure just that. The regulator clarified its stance on money laundering and sanctions, insisting firms comply with the UK’s Money Laundering Regulations by maintaining effective systems to manage such risks. It also expects firms to have sound controls to identify and manage sanctions exposure and risk.
Unfortunately, the FCA has identified a growing trend of financial crime among payment firms, given their bank-like services, their willingness to service higher-risk customers, and the potential for exploitation due to weaker systems and controls. The regulatory body has prioritised money laundering & sanctions and fraud as it focuses on ensuring firms do not compromise financial system integrity.
The FCA has outlined several areas where it has found significant issues with financial crime systems and controls over the past two years, emphasising that firms must resolve these issues. It also called on payment and electronic money institutions to take immediate action to guard against fraud and protect their customers from becoming victims. Failure to enact robust compliance measures could potentially foster financial crime and fraud, compromising the financial system. The FCA warned it would respond with ‘swift and assertive action’ to protect customers and uphold market integrity.
Arctic Intelligence stands ready to support FCA regulated businesses, including e-money providers, money remittance services, and payment processors. Their award-winning platforms assist clients in identifying and assessing money laundering and terrorism financing risks, helping to create robust and proportionate controls to mitigate these risks.
The solutions offered by Arctic Intelligence for Money Laundering, Terrorism Financing, Sanctions, Bribery & Corruption and Fraud support payment and electronic money institutions in meeting the FCA’s requirements, reducing the risks of their firm being exploited by criminal networks.
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