The Financial Conduct Authority (FCA) has found that many small banks and commercial insurance intermediaries fail to effectively manage financial crime risk.

The two reviews published in November 2014 related work by the FCA’s predecessor on banks in 2011 and intermediaries in 2010.

While the reviews found some firms had made good progress in addressing areas of weakness and saw examples of good practice, there were significant shortcomings at other firms.

The FCA has proposed further guidance for all firms to ensure that expectations are clear.

Tracey McDermott, FCA director of enforcement and financial crime, said:

• “Firms must take their responsibility to reduce the risk of financial crime seriously. Significant improvements are still required in this area.

• “To do that successfully requires firms to use their judgement and common sense.

• That is not about box ticking or wholesale de-risking.

• It is about firms getting the basics right – understanding their customers, the risks they pose and managing those risks proportionately and sensibly.”

The FCA reviewed ten commercial insurance intermediaries and 21 banks – ten of these firms (five banks and five intermediaries) were also part of the 2010 and 2011 thematic reviews. The FCA found:

1. Despite extensive work over recent years to address key issues, there were significant and widespread weaknesses in most banks’ anti-money laundering systems and controls, and in some banks’ sanctions controls.

a. Although senior management engagement had improved, a third of banks had

i. inadequate resources;

ii. staff often had weak knowledge of money laundering risks; and

iii. some overseas banks struggled to reconcile their group policies with higher UK requirements.

b. Since the FCA’s review, several banks have replaced their Money Laundering Reporting Officers;

c. four firms have temporarily restricted their business whilst they correct the weakness in their controls; and

d. the FCA has instructed three banks to undertake an independent review of their systems and controls (a skilled person’s review); and

e. two firms have been referred to the enforcement division for investigation.

2. Overall, most intermediaries’ controls failed to manage bribery and corruption risk effectively.

a. While some intermediaries’ policies on remuneration, hospitality and training had improved since the last review, bribery and corruption risk assessments were often too narrow and many firms failed to take a rounded view of the risks associated with individual relationships.

b. Half of the third party and client files reviewed were inadequate and senior management oversight was often weak.

These reviews, enforcement action, and proposed new guidance – which updates the FCA’s financial crime guide for firms – reflect the FCA’s objectives to ensure markets work well, enhance the integrity of the UK financial system and ensure consumers are appropriately protected.

Key links

1.    The latest review of small commercial insurance intermediaries, = http://bit.ly/1xVTzz9

2.    the review of small banks, and = http://bit.ly/11wX4iW

3.    the FCA’s proposed update to its financial crime guide. = http://bit.ly/1qOqWOq

4.    The FSA’s 2011 review of banks’ management of high money-laundering risk situations. = http://bit.ly/1y4McrL

5.    The FSA’s 2010 review of bribery and corruption in commercial insurance brokers. = http://bit.ly/1DALQea

The FCA’s Financial crime: a guide for firms. = http://bit.ly/1q5pfNS