The UK financial regulator has reviewed asset management and platform firms to look at their crime controls, as a prelude to possible disciplinary action. This article considers the details.

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The UK's Financial Conduct Authority has published a “thematic review” of asset management and platform firms and the efficacy of their financial crime controls, presumably as a prelude to some disciplinary action later in the year. It and its predecessor organisation, the Financial Services Authority, visited 22 firms of all types – wealth/asset management firms, fund firms and platform firms – in 2012-13 and this is the result.

In the review the FCA made it plain that it was interested only in money-laundering and bribery and corruption. It explicitly said that it had no interest in terrorist finance in this instance and did not even mention other financial crimes such as fraud, insider-dealing and market manipulation.

The review started with an observation that the “risk” of money-laundering and corruption may increase wherever there is a big-ticket or "unexpected" transaction. This cuts to the heart of the nature of “suspicion” – the stage of alertness that every firm should reach before sending off a “suspicious transaction report” to the National Crime Agency – as it applies to high-net-worth individuals. It is an old trope that the spotting of “unusual” transactions is not the same thing as the spotting of suspicious transactions because almost all HNW transactions are unusual. The FCA does not tackle this problem with any advice – a position its predecessor the Financial Services Authority always took, no matter how closely it was questioned.

Throughout the report the FCA dwelt on the common problem of bad record-keeping in this area. It thought that clear reporting lines and lines of responsibility for controls against these financial crimes were quite good on the whole. It did not, however, think that the effectiveness of these structures was documented for all to see. At one point it berated firms for not having “customer due diligence” (a stilted phrase from the Basle Group that the EU picked up and started using instead of “know your customer” in 2001) records ready for its people to look at. This, too, was a reference to bad record-keeping. At one firm, the FCA complained, a customer had withdrawn £25 million and this triggered off a transaction monitoring alert, but no evidence was available in the records of who reviewed it or why it was eventually waved through. Not only might compliance officers draw the lesson from this story that good record-keeping is essential; they might also be inclined to think that it is always wise to spend the most effort (record-keeping and otherwise) on customer-files that the FCA is likely to find high-profile.

Hidden in among the detail of the review paper was a compliment for firms: “The type and level of sophistication of transaction monitoring systems and controls implemented by firms is typically dependent on the nature, scale and complexity of a firm's business activities.” This was another way of saying that the firms the FCA surveyed were actually successful in observing the doctrine of “proportionality”.

The FCA looked briefly at the way firms paid and vetted their staff. It was most pleased with those firms that used long-term incentive plans to pay staff extra for their performance as this diffused such rewards over a wider period and was likely to induce a measure of stability. The idea was that one-off bonuses for “performance” were only too easy to use as excuses for corrupt payments for cutting corners or worse. The regulators also approved of the fact that firms typically vetted staff by checking their credit ratings; verifying their names and addresses; looking at their previous employment; searching for County Court judgments; and going to the education authorities for records of that. They also liked the idea of practical training that was aimed squarely at the risks that every firm faced.