Thought for the Week: FCA calls on firms to calibrate their controls to tackle financial crime

In a recent speech, a senior official from the FCA emphasised the importance of tackling financial crime and called for authorised firms to improve their calibration of financial crime controls or face more spot-checks from the FCA.

The FCA's approach

On 6 September 2023, Sarah Pritchard, Executive Director of Markets and International, described the FCA's commitment to reducing financial crime as a "key super charged priority" for the coming year.

As part of its strategy to identify and prevent financial crime, the FCA has laid on more resources to assess firms' controls when authorising firms at the gateway, as well as employ data testing and tools that help the FCA identify weaknesses at an early stage. Ms Pritchard emphasised the FCA's focus on outcomes and results, highlighting that in the past year, the regulator:

• carried out 352 proactive assessments of sanctions – a fourfold increase on the previous year; and
• opened 610 financial crime supervision cases - representing a 65% increase from the previous year.

Ms Pritchard highlighted the regulator's successful public and private partnerships and noted that the FCA will assess firms' financial crime systems in the context of the new Consumer Duty which came into force in July of this year.

What does the FCA expect of firms?

The FCA expects firms to employ a flexible, risk-based approach, ensuring that their systems and controls are proportionate and appropriate to their business and client-base. Effective calibration of controls includes:

• understanding clients well;
• identifying the type of transactions firms would expect clients to make; and
• having systems in place to spot suspicious activity.

The expectation that firms follow a proportionate, risk-based approach is consistent with the FCA's recent findings in its report on good and bad sanctions practice (see our briefing for more detail) and its ongoing review of firms' treatment of domestic PEPs (see our briefing).

Specific risk: outsourced arrangements

In particular, Ms Pritchard flagged the risk posed by outsourced arrangements, warning firms that they cannot outsource or delegate risk calibration to third parties.

Practical takeaways

Firms are likely to face more scrutiny from the regulator in this area. It would be prudent, therefore, to review systems and controls and be prepared to show that they are appropriate, proportionate and calibrated to the specific risks the firm is exposed to. We are here to advise you should you need our help.

Authors: Neil Donovan, Senior Associate; Eleanor Robinson, Senior Expertise Lawyer; James Levy, Partner; Rebecca Akroyd, Trainee Solicitor