The summer of 2023 has brought much media attention to the topic of banking so-called politically exposed persons (PEPs), as well as the introduction of new legislation in the UK to address the problem of PEP bank account closures through tighter regulation, coupled with reviewing financial institutions’ (FI’s) compliance with existing rules. With the end of the year drawing closer, it remains to be seen how much practical change these reforms will bring.
What is a PEP?
The term ‘PEP’ generally covers those who hold, or recently held, prominent public functions. UK legislation provides no exhaustive list of such functions and, ultimately, it is up to FIs to assess prominence, which can cause practical difficulties with categorising customers and result in anomalies. PEP categorisation will also have implications for family members and ‘known close associates’.
FIs and others subject to anti-money laundering supervision in the UK are obliged to identify existing or potential customers and their beneficial owners, including assessing whether they are PEPs. Banks are expected to proactively manage the risks arising from their relationship with PEP customers, including establishing appropriate systems and controls.
Just as there is no uniform definition of the word, there is also no single global database of PEPs. Typically, FIs – which are expected to take into account all public information reasonably available – will consult external lists maintained by third-party compliance service providers to identify PEPs and to assess the risks they pose.
Can PEPs have bank accounts in the UK?
Banks do not need to decline or close a business relationship with someone merely because they meet the definition of a PEP, but they can do so where they consider that the relationship would cause too high a risk for them to be able to effectively manage.
Thus, being identified as a PEP should not result in the automatic withdrawal of banking facilities. However, we have seen an increase in the volume of banking services being terminated due to a client’s PEP status – a process also known as de-risking. While FIs’ risk appetite may vary, those who have accounts closed may also find it hard to open alternative facilities at other institutions.
What can be done once an account is closed?
A customer that is not, or no longer aligned with an institution’s risk appetite is the most common reason given for de-risking. In such situations, PEPs should make a data subject access request to establish the information on which the decision to terminate was made.
Customers should not only make representations to the bank but also to the compliance database provider with a view of getting inaccurate information deleted. Where FIs stick to their guns – as is often the case – the PEP can complain to the Financial Services Ombudsman.
What changes will the reforms bring?
The reform proposals, which are set to become law in the autumn, stop short of providing PEPs (and others facing account closures) with a statutory right to review and challenge their banks before the decision becomes final, and as it stands, there is no route to challenge in court. However, they represent a step in the right direction by requiring banks to give 90 days’ notice of all intended closures and explain their decision.
It has been recently announced by the UK government that it will accelerate the rate at which the Financial Conduct Authority (FCA) will be required to conduct its review into FIs’ compliance with their legal duties. The expectation on the FCA to underline that PEP status cannot automatically result in the termination of any banking relationship, and that risk assessments must be carried out on a case-by-case basis, is welcome.
In reality, FIs will always be able to choose whom they service, but a shift in the current de-risking culture is necessary. A granular review of risk rating practices and closure decision making is more likely to bring about cultural changes – but this may well be a long-term objective.