6.1 BACKGROUND

In the UK, financial services regulation has travelled through a series of routes to arrive at the current position, which itself is in a period of change. Initially, regulation in the UK for banking was the clear responsibility of the Bank of England, with its powers being enshrined in a series of banking laws and guidance published in various regulations.

This changed with the development of broader financial services regulation as a result of the implementation of the Financial Services Act 1986. This did not really change the responsibilities of the Bank of England, which remained a full central bank with responsibility for the regulation of banks, but introduced the Securities and Investments Board. The Board carried out very little direct regulation, but did ensure that a series of industry-based regulators achieved the standards of regulation required. Effectively, this enshrined the principle of self-regulation which became a driver for UK financial services regulation for a decade. The Securities and Investments Board was eventually replaced by the Financial Services Authority (FSA), which also took over the responsibilities for the majority of the self-regulatory bodies that previously existed (for example, the Personal Investment Authority (PIA) and the Investment Managers Regulatory Organisation (IMRO)).

6.2 THE FINANCIAL SERVICES ACT 2012

The most recent development came on 1st April, 2013, when the Financial Services Act 2012 divided the FSA into two new entities: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The FCA regulates the financial services industry with a focus on consumers and stability within the industry, while the PRA, which is a part of the Bank of England, is responsible for the prudential regulation of banks, building societies, credit unions, insurers and major investment firms.

The Financial Services Act 2012 made significant amendments to the Financial Services and Markets Act 2002 (FSMA), which had previously set out the structure of financial service regulation in the UK.

The Financial Services Act imposes both definitive and aspirational objectives on both the FCA and the PRA.

6.3 THE FINANCIAL CONDUCT AUTHORITY OBJECTIVES

The single definitive objective of the FCA is “ensuring that the relevant markets function well”. The relevant markets are defined as the financial markets, the markets for regulated financial services and the markets for services that are provided by persons other than authorised persons in carrying on regulated activities but are provided without contravening the general prohibition (see Section 6.6, “Fit and Proper Person Rules” below), and the FCA must take the following aspirational objectives into account when fulfilling this strategic objective.

6.4 THE PRUDENTIAL REGULATION AUTHORITY (PRA) OBJECTIVES

The Financial Services Act imposes strategic objectives and an aspirational objective on the PRA in the same way as it does on the FCA. The PRA's main objective is to promote the safety and soundness of PRA-authorised persons, which it must do by seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the UK financial system, and seeking to minimise the adverse effect that the failure of a PRA-authorised person could be expected to have on the stability of the UK financial system.

6.5 ENHANCING PUBLIC UNDERSTANDING OF FINANCIAL MATTERS

The FSMA created the Consumer Financial Education Body to enhance the understanding and knowledge of members of the public of financial matters (including the UK financial system), and the ability of members of the public to manage their own financial affairs. The consumer financial education function included, in particular, promoting awareness of:

• The benefits of financial planning;
• The financial advantages and disadvantages in relation to the supply of particular kinds of goods or services;
• The benefits and risks associated with different kinds of financial dealing (which includes informing the FCA and other bodies of those benefits and risks);
• The publication of educational materials or the carrying out of other educational activities;
• The provision of information and advice to members of the public;
• Assisting members of the public with the management of debt; and
• Working with other organisations which provide debt services, with a view to improving the availability to the public of those services, the quality of the services provided and consistency in the services available, in the way in which they are provided and in the advice given.

Although the provisions for its creation are repealed by the Financial Services Act 2012, there are new provisions to continue its existence. Furthermore, the final two parts of its remit – both relating to debt – have been added, in response to the heightened public awareness and political implications of debt since 2008.

6.6 FIT AND PROPER PERSON RULES

The FSMA introduced the regulatory framework through the General Prohibition in 2000, and is unaltered by the recent legislative changes. The General Prohibition states that “no person may carry out a regulated activity in the UK unless they are an authorised or an exempt person”. Therefore, firms and individuals who work for firms must be approved by the FCA. In order to be approved by the FCA individuals responsible must be “fit and proper”, which means that they are considered appropriate people to be involved with such a significant role.

Individuals will be considered to be “fit and proper” by the FCA in relation to the following:

• Honesty, integrity and reputation;
• Competence and capacity;
• Financial soundness.

Within the rule book of the Financial Conduct Authority the regulations promulgated by the Joint Money Laundering Steering Group (see Chapter 7) are adopted as best practice. No separate detailed guidance regarding money-laundering deterrence and terrorist financing appears within the FCA handbook, although the FCA has released a separate guide to minimising the risk of money laundering, which is not binding.

6.7 FCA REGULATION AND MONEY-LAUNDERING DETERRENCE

With regard to discharging its general functions, both the FCA and the PRA are obliged, under the Financial Services Act, to have regard to:

1. The need to use the resources of each regulator in the most efficient and economic way.
2. The principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction.
3. The desirability of sustainable growth in the economy of the United Kingdom in the medium or long term.
4. The general principle that consumers should take responsibility for their decisions.
5. The responsibilities of the senior management of persons subject to requirements imposed by or under this Act, including those affecting consumers, in relation to compliance with those requirements.
6. The desirability, where appropriate, of each regulator exercising its functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons subject to requirements imposed by or under this Act.
7. The desirability in appropriate cases of each regulator publishing information relating to persons on whom requirements are imposed by or under this Act, or requiring such persons to publish information, as a means of contributing to the advancement by each regulator of its objectives.
8. The principle that the regulators should exercise their functions as transparently as possible.

The FCA's outline requirements relating to money laundering are contained in the FCA rulebook, under the Senior Management Arrangements, Systems and Controls (SYSC) rules. Having comparatively limited “rules” supplemented by a non-binding guidebook has enabled firms to have more discretion when choosing to adopt anti-money-laundering practices. Guidelines relating to money laundering contained in SYSC include the following:

• A firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be used to further financial crime.
• A firm must ensure that these systems and controls enable it to identify, assess, monitor and manage money-laundering risk, and are comprehensive and proportionate to the nature, scale and complexity of its activities.
• A firm must carry out regular assessments of the adequacy of these systems and controls to ensure that it continues to comply with the requirements.
• The FCA, when considering whether a breach of its rules on systems and controls against money laundering has occurred, will have regard to whether a firm has followed relevant provisions in the guidance for the UK financial sector issued by the Joint Money Laundering Steering Group.
• In identifying its money-laundering risk and in establishing the nature of these systems and controls, a firm should consider a range of factors, including its customer, product and activity profiles, its distribution channels, the complexity and volume of its transactions, its processes and systems and its operating environment.

The rulebook also provides that a firm should ensure that the systems and controls include:

• Appropriate training for its employees in relation to money laundering.
• Appropriate provision of information to its governing body and senior management, including a report at least annually by that firm's Money Laundering Reporting Officer (MLRO) on the operation and effectiveness of those systems and controls.
• Appropriate documentation of its risk-management policies and risk profile in relation to money laundering, including documentation of its application of those policies.
• Appropriate measures to ensure that money-laundering risk is taken into account in its day-to-day operation, including in relation to the development of new products, the taking on of new customers and changes in its business profile.
• Appropriate measures to ensure that procedures for identification of new customers do not unreasonably deny access to its services to potential customers who cannot reasonably be expected to produce detailed evidence of identity.

A firm must allocate to a director or senior manager (who may also be the Money Laundering Reporting Officer) overall responsibility within the firm for the establishment and maintenance of effective anti-money-laundering systems and controls.

Additionally, a firm must appoint an individual as MLRO, with responsibility for oversight of its compliance with the FCA's rules on systems and controls against money laundering, and ensure that its MLRO has a level of authority and independence within the firm and access to resources and information sufficient to enable him to carry out that responsibility. The job of the MLRO within a firm is to act as the focal point for all activity within the firm relating to combating money laundering. The FCA expects that a firm's MLRO will be based in the United Kingdom.

The regulatory structure under which UK money-laundering deterrence and terrorist-financing legislation operates is considered in the following sections.

6.8 THE PROCEEDS OF CRIME ACT 2002

The Proceeds of Crime Act 2002 (POCA) consolidates and extends the existing UK legislation regarding money laundering. The legislation covers all crimes and any dealing in criminal property, with no exceptions and unusually no de minimis. The effect of this is that any theft or other criminal offence regardless of value is, in principle, subject to these rules. The POCA has three main objectives:

1. It establishes the Assets Recovery Agency to conduct an investigation to discover whether a person holds criminal assets and to recover the assets in question.
2. It creates five investigative powers for the law-enforcement agencies:
   • A production order;
   • A search and seizure order;
   • A disclosure order;
   • A customer information order;
   • An account-monitoring order.
3. It establishes the following criminal offences:
   • Acquiring, using, possessing, concealing, disguising, converting, transferring or removing criminal property from the jurisdiction, or entering into or becoming involved in an arrangement to facilitate the acquisition, retention, use or control of criminal property by another person.
   • For persons working in the regulated sector, of failing to make a report where they have knowledge or suspicion of money laundering or reasonable grounds for having knowledge or suspicion that another person is laundering the proceeds of any criminal conduct, as soon as is reasonably practical after the information came to their attention in the course of their regulated business activities.
   • For anyone taking any action likely to prejudice an investigation by informing (tipping off) the person who is the subject of a suspicious report, that a report has been made to a nominated officer or to the Serious Organised Crime Agency (SOCA),¹ or that the police or customs authorities are carrying out, or intend to carry out, a money-laundering investigation.
   • Destroying or disposing of documents which are relevant to an investigation.
   • Failing to comply with a requirement imposed under a customer information order, or knowingly or recklessly making a statement in purported compliance with a customer information order that is false or misleading in a material particular.

POCA also sets out the maximum penalties as follows:

• For the offence of money laundering, 14 years' imprisonment and/or an unlimited fine. However, an offence is not committed if the offence was reported to SOCA as soon as was reasonably practical.
• For failing to make a report of suspected money laundering or for “tipping off”, five years' imprisonment and/or an unlimited fine.
• For destroying or disposing of relevant documents, five years' imprisonment and/or an unlimited fine.

The Proceeds of Crime Act is just one of the many laws which impacts on money laundering and terrorist financing. It needs to be considered in terms of its impact on other relevant regulation, including the Policing and Crime Act 2009, Coroners and Justice Act 2009, UK Borders Act 2007 and, most recently, the Crime and Courts Act 2013, as well as the four codes of practice which supplemented this legislation.

6.9 TERRORISM ACT 2000, AND THE ANTI-TERRORISM CRIME AND SECURITY ACT 2001

The Terrorism Act 2000 establishes a series of offences related to the involvement of persons or organisations in arrangements for facilitating, raising or using funds for terrorist purposes.

The Terrorism Act sets out the following criminal offences:

• For any person not to report the existence of terrorist property where there are reasonable grounds for knowing or suspecting the existence of terrorist property.
• For anyone taking any action likely to prejudice an investigation by informing (i.e. tipping off) the person who is the subject of a suspicion report, or anybody else that a disclosure has been made to a nominated officer or to the SOCA, or that the police or customs authorities are carrying out, or intending to carry out, a terrorist-financing investigation.
• For anyone entering into or becoming concerned in an arrangement which facilitates the retention or control by, or on behalf of, another person of terrorist property by concealment, by removal from the jurisdiction, by transfer to nominees or in any other way.

Other counter-terrorism legislation was passed in 2005 (Prevention of Terrorism Act 2005), 2006 (Terrorism Act 2006), 2008 (Counter-Terrorism Act 2008) and 2010 (the Terrorist Asset-Freezing etc. Act 2010), all of which state the prevention of terrorism as one of their purposes in their introductory text. This repeated strengthening of the counter-terrorism framework highlights the UK's dedication to preventing this area of financial crime. Under the Terrorist Asset-Freezing etc. Act 2010, the Treasury is required to publish a quarterly report to Parliament on its operation of the UK's asset-freezing regime.

The parallels to the POCA can be seen clearly, with the general wording being both consistent and similar.

The Terrorism Act then sets out the following penalties:

• The maximum penalty for failure to report under the circumstances set out above is five years' imprisonment and/or an unlimited fine.
• The maximum penalty for the offence of actual money laundering is 14 years' imprisonment and/or a unlimited fine.

Again, these are consistent with the approach adopted by the POCA.

The Anti-terrorism Crime and Security Act 2001 gives the authorities power to seize terrorist cash, to freeze terrorist assets and to direct firms in the regulated sector to provide the authorities with specified information on customers and their (terrorism-related) activities. As such, it implements those of the nine special recommendations of the Financial Action Task Force (FATF) not already incorporated into UK legislation.