UK: FCA’s approach to money laundering through markets

Why should I read this?

The UK Financial Conduct Authority (FCA) recently published a ‘Dear CEO’ letter which outlined its strategy for the supervision of wholesale brokers. This letter was published in conjunction with the FCA’s review of Money Laundering Through the Markets (MLTM), which sets out a number of weaknesses identified during a detailed review of a representative sample of brokers and other firms operating in the capital markets.

The FCA last undertook a Thematic Review of financial crime systems and controls at capital markets firms in 2019. Whilst the FCA acknowledged that some progress had been made since then, it remains concerned that some firms fundamentally underestimate the money laundering risks to which they are exposed. It is the FCA’s view that this lack of understanding about how firms might be targeted by criminals leads to inadequate control frameworks that expose participants and the overall transaction to financial crime. The FCA has raised these concerns previously in ‘Dear CEO’ letters published in 2019 and 2023.

Remember - the FCA expects firms to understand the financial crime risks relevant to their business and to take a proportionate risk-based approach to implementing robust systems and controls.

What were the key findings?

• Business-Wide Risk Assessment (BWRA): there had been failures to tailor the BWRA to the specific nature of the firm and its business or identify scenarios that would trigger an updated assessment, and a lack of consideration as to how the BWRA feeds into process, controls and decision making.
• Customer risk assessment (CRA): the FCA identified poorly documented methodologies, inadequate rationales for risk ratings and limited consideration of holistic risk factors. There were also examples of failures to distinguish between domestic and foreign Politically Exposed Persons.
• Customer due diligence (CDD): there had been failures to tailor CDD to the risks identified through both the CRA and ongoing monitoring activities, and to record the nature and purpose of the account and expected account activity. There were also instances of firms placing inappropriate reliance on counterparties in the transaction chain completing CDD.
• Governance and oversight: the FCA identified various instances where insufficient financial crime knowledge and awareness was held by senior management function holders in smaller firms and where there was inconsistent recording of discussions, decisions and actions.
• Transaction monitoring (TM): the FCA noted there had been a general focus on market abuse but not on wider financial crime risks with challenges in identifying suspicious activity, as well as failures to use TM as part of an integrated financial crime framework.
• Training and resource: there had been instances of failures to increase resource in line with business growth and over reliance on individual experience and knowledge.

How could the FCA intervene?

Firms that consistently fail to meet the FCA’s expectations may find themselves subject to regulatory intervention, including:

• Voluntary or FCA-imposed restrictions on business activities, for example regarding the customers that a firm can onboard in the absence of sufficient controls to prevent financial crime; 
• Attestation requests, which require the appropriate senior manager(s) to attest that actions will be completed within a specified timescale and that the risks identified have been mitigated and resolved; and/or
• A Skilled Person review, which will assess areas of concern against regulatory requirements and, where required, make recommendations for improvements.

The FCA can also undertake visits with little or no warning to test a firm’s financial crime framework and formally require the production of documents and information.

Protracted correspondence with FCA Supervision on these matters will, at the very least, consume a significant amount of management time and resource, particularly where the firm is required to deliver improvements at pace.

In extreme cases, where the FCA considers that serious misconduct may have occurred, it may investigate and take enforcement action against firms and individuals.

How does your firm measure up?

A clear takeaway from the recent publications is the FCA’s expectation that financial crime risks need to be understood by the business more broadly so that the framework mitigates risk more effectively. Firms should take proactive steps to understand whether they could fall into the category of firms that the FCA believes are still underestimating their financial rime risks and how these might crystallise.

In the first instance, you should consider whether your trading desks and relationship managers would be able to answer the following questions:

• Do you understand the terms: money laundering, terrorist financing and proliferation financing?

• Can you list any features of capital markets that make them attractive to criminals or susceptible to being used to launder the proceeds of crime?

• Can you identify the top money laundering risks identified in the firm’s BWRA?

• Can you explain the key money laundering risks in respect of the firm’s customers?

• Do you understand what a PEP is and the firm’s procedures for dealing with PEPs?

• Can you give any examples of situations that might indicate suspicious behaviour?

• Do you understand the requirement to establish the nature and purpose of a customer account, as well as expected account activity, and why this is important?

• Do you understand the difference between source of wealth and source of funds, how you would you seek to understand these for a particular customer and why this is important?

• Do you know how to manage conflicts of interest and why this is important?

• What information would you use to assess whether trading activity was suspicious?

• What are the similarities and differences between market abuse risk indicators and money laundering risk indicators?

• How is transaction monitoring used to help the firm understand its customers and trading activity?

• What is the process for escalating money laundering concerns? What kind of concerns would you escalate?

• Does the firm share information about suspicious activity with other market participants?

If there are significant gaps in your colleagues’ knowledge about these matters, this might indicate weaknesses in the design and/or implementation of your financial crime framework and will no doubt be of interest to the FCA.

What should firms do?

Be proactive – don’t wait for the FCA to come knocking on your door.

The FCA expects firms to consider the themes detailed in the MLTM review against their own systems and controls. Firms should also discuss the Dear CEO letter with their Boards by the end of March 2025. 

More broadly, firms should consider where they rank on the scale outlined in the MLTM review, ask pertinent questions of their business teams, and take steps to improve controls before the FCA intervenes. Proactive consideration of these issues will increase the likelihood of a favourable outcome should problems emerge.

Further reading

Portfolio letter: Wholesale brokers 2025

Assessing and reducing the risk of money laundering through the markets