By Vanya Dragomanovich
As the U.K.'s Financial Conduct Authority navigates its first week of existence, the agency's newly released business plan promises a tough approach on fighting financial crime with a focus on complex cases.
Released in anticipation of the April 2 launch date of the regulator, known as the FCA, the plan details its strategy to strengthen supervision in the aftermath of several scandals, including the fixing of the London Interbank Offered Rate (LIBOR). Earlier this week, the FCA assumed the supervision of anti-financial crime rules from the now-defunct Financial Services Authority.
On the enforcement and financial crime front, the focus in 2013 and 2014 will be on what the watchdog calls "high impact firms," a group of 14 major U.K. retail and investment banks that have been put under intense scrutiny over their anti-money laundering, counterterrorist financing and financial sanctions systems and controls in 2012. The 14 institutions will become an ongoing part of the FCA's "intensive and intrusive" Systematic Anti-Money Laundering Programme (SAMLP).
"The FSA is already trialling the SAMLP on a number of big banks," said Susannah Cogman, partner at Herbert Smith Freehills LLP in London. The program was put in place after two reports—a 2011 paper on money laundering risks and a March 2012 report on bribery and corruption—found British banks wanting on both fronts.
SAMLP will entail more intense supervision of bribery and corruption controls of the 14 institutions beginning in the second half of 2013, according to an industry source, who asked not to be named. The 14 banks will likely permanently remain part of the program while other financial institutions will be be examined for AML controls on 4-year rolling cycles, the person said.
"What the FCA will be doing is more of the same as what the FSA did until now, just more frequently and more intensely," said the source, adding that the FCA will more closely scrutinize how banks vet their high-risk clients for financial crime risks.
In the FSA's October Financial Crime Newsletter, Tracey McDermott, director of enforcement, said that nearly half the firms the regulator had looked at did not have adequate bribery and corruption risk assessments or sufficient management procedures in place, and most firms had not taken into account legal changes such as the 2010 Bribery Act.
With regard to anti-money laundering (AML) compliance, in a June 2011 report the FSA said that around a third of the banks appeared unwilling to turn away or exit very profitable business relationships even when there seemed to be an "unacceptable risk of handling the proceeds of crime." Seventy-five percent of banks surveyed failed to take adequate measures to establish the legitimacy of funds within accounts for politically exposed persons (PEPs), the FSA found.
Going forward, "our reviews will focus largely on U.K. operations, but will include visits to overseas operations, where the risks justify it or important AML functions are off-shored," the regulator said.
On the surface, the reaction of the banking industry to the FCA's plans has been positive. In an op-ed piece in the Telegraph Wednesday, British Bankers Association's Chief Executive Anthony Brown welcomed the new regulator and said its priorities align with those of the banking industry, which are to restore confidence and trust in financial services, and to ensure customers' needs are the priority.
Daren Allen, head of the financial crime team at Berwin Leighton Paisner LLP, said that the FSA has, in recent years, sent the wrong message.
"In circumstances where firms should be encouraged to work proactively with law enforcement they are, instead, as a consequence of the approach adopted by the regulator, encouraged to adopt a tick-box approach, ensuring that documents are in place to justify each and every decision made," said Allen.
In terms of market abuse, the FCA said it will rely on its ZEN database, which tracks all financial transactions in the equity, bonds and derivatives markets, to uncover anomalous transactions.
"The FSA already gets the information about financial transactions, but going forward it will conduct a deeper analysis of the data it gathers," said Cogman. Although the FCA's business plan does not represent a dramatic shift from what has been in place since last April, there is a change in supervisory control towards stricter oversight, she said.
The FCA, which is to supervise the conduct of around 26,000 companies in the financial services industry, will operate on a budget of 445.7 million pounds between now and next April. Of that, 60 percent will be spent on almost 3,000 staff, a quarter of which will focus on supervision, according to Martin Wheatley, FCA's chief executive in the business plan.