UK Financial Crime Reporting Consultation

23 November 2020

The FCA has launched a consultation, open until 23 November 2020, on their proposal to extend the scope of the annual financial crime report (REP-CRIM) to cover firms which conduct activities deemed to pose higher money laundering (ML) risks, including all cryptoasset exchange and custodian wallet providers ('cryptoasset businesses'). REP-CRIM information relates to a firm's systems and controls for preventing financial crime and includes, for example, the resources dedicated to combating financial crime, and the number of suspicious activity reports submitted to the National Crime Agency.

By collecting more REP-CRIM information under this proposal, the FCA expects to enhance their understanding of inherent ML risks across the financial services sector as well as their implementation of an effective, risk-based approach to financial crime supervision. Further, the FCA believe that this focused and effective regulatory approach would contribute to improving firms' systems and controls for preventing financial crime, therefore reducing ML risk and strengthening market integrity in the UK financial sector.

Currently, out of 23,000 firms supervised by the FCA under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), only around 2,500 submit REP-CRIM information. For certain firms such as e-money institutions and consumer credit firms, the obligation to submit REP-CRIM information only applies if their total revenue is £5m or more.

Under the proposed extension, however, the REP-CRIM obligation would apply to the following businesses regardless of their total revenue:

-       all cryptoasset exchange providers and custodian wallet providers;

-       all electronic money institutions, Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs);

-       all FSMA-authorised firms within the scope of the MLRs that either a) hold client money or assets; or b) conduct activities considered by the FCA to pose higher ML risk; and

-       all payment institutions except those which only carry out a select few activities such as money remittance, as outlined in the consultation document.

Additionally, the FCA propose to remove the reporting obligations from two activities they deem beyond the scope of the MLRs: a) home finance mediation, and b) making arrangements with a view to transactions in investments.

While the FCA conducted an industry survey and subsequent cost-benefit analysis of their proposal, including estimates of the costs to firms of complying with the reporting obligation, the potential benefits of the proposal could not feasibly be quantified. Nonetheless, the overall benefits to consumers and firms alike of tackling financial crime are expected to outweigh the costs associated with this proposal, which would primarily comprise one-off costs with relatively lower ongoing costs.

However, internalising these costs may still be problematic at the firm level, especially for smaller firms which may no longer benefit from exemptions under a total revenue threshold. Further, difficulties in complying with the REP-CRIM reporting obligation may resonate across the financial sector if the FCA fulfil their long-term intention, as advised by the FATF in the UK's 2018 mutual evaluation report, to impose the obligation on all firms that they supervise under the MLRs.

Alongside this recommendation, the FATF had suggested varying the frequency of reports in line with the risks posed by each firm. This approach should be actively considered, as smaller firms, in particular, could benefit significantly from a reduced burden of less frequent reporting obligations.

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