The asset management sector appears to be popular with the FSA at the moment (see article on ‘Conflicts of Interest’ in this Regulatory Roundup), given a recent speech by Tracey McDermott, FSA Director of Enforcement and Financial Crime Division.
Although financial crime is of relevance to all firms within the financial services industry, investment management is now coming onto the radar. In the speech we are told that in the past couple of years the FSA concentrated on banks and investment banks but now “we are moving on to asset managers, a sector my financial crime teams have not probed in depth” with the promise that their thematic review of the sector will begin very soon (“first visits in the coming weeks”). It may be recalled that in Regulatory Roundup 45 we alerted firms to this, based upon a brief comment made in issue 16 of the FSA’s ‘Financial Crime Newsletter’.
It is interesting to note that following the recent thematic review, the FSA did not look to enforcement but instead decided to host an investment fraud roundtable for the firms involved in the project. However the goodwill will not continue; the FSA wants it to be known that it has made clear its expectations and wants firms to improve – the Regulator “will be checking” and will take action if they have not.
The FSA has also taken the opportunity to update its earlier guidance relating to financial crime (see e.g. Regulatory Roundup 31). The guidance is in two parts: part 1 provides practical information for firms. whereas part 2 contains summaries of thematic visits and examples of good and poor practice. The changes are fairly modest – please see the ‘feedback and changes guide’ link.
The speech tells us that the thematic review of asset managers will look at systems and controls to counter money laundering, sanctions breaches and bribery and corruption. The reviews will also consider issues that are specific to the asset management industry – but what these are is not spelled out.
Firms, and especially asset management firms, that do not want to feature in the wrong end of (the to be) published examples of good and poor practice (which should be available in the third quarter of next year) should use these guides as a reference point against which they can benchmark current practices and develop an action plan to address any identified failings.
One could also look at the (banks’) failings highlighted in the speech: basic weaknesses in identifying high risk customers such as PEPs; undertaking proper due diligence and monitoring of accounts. Surprisingly, over three quarters of the banks visited failed to take adequate measures to establish the legitimacy of the source of wealth and sources of funds, with more than half failing to apply meaningful enhanced due diligence measures in high risk situations; it appeared that some banks were unwilling to turn away business despite there appearing to be an unacceptable risk of handling the proceeds of crime.