Changes to AML Supervision

Lee Eagling is joined by Andy Holton to discuss the recent response by HM Treasury to the consultation on anti-money laundering (AML) and counter-terrorism financing (CTF) supervision. They explore the government's decision to appoint the FCA as the single professional services supervisor, the implications for firms currently regulated by professional bodies, and what practitioners should expect as the transition unfolds. With practical insights and advice, this episode is essential listening for firms preparing for a tougher compliance landscape.

For more information on this topic and more, please visit www.mercia-group.com for further details.

Transcript

Hi everybody, and welcome to this edition of The Mercia Podcast with me, Lee Eagling.

I am delighted that I've been joined by our resident AML guru, Andy Holtom, when we're here to talk about the recent response to the consultation around AML supervision.

And do you want to say a quick hello? Hello everyone.

Nice to be with you.

We thought Andy was the prime person to cover this topic off.

During.

Many of you will have be aware of Andy what he does here at Mercia.

He's author of AML manual.

He delivers a number of AML courses and part of the team, along with myself, that deliver a number of AML compliance reviews and answering AML, TCU.

So we thought we'd have a look through the consultation that we're out here recording this on the morning of Friday, the twenty fourth of October.

The response to the consultation that came out a little earlier this week.

So, Andy, is it worth just giving people a bit of a background on what the consultation was, maybe a bit of potted history of how AML supervision currently works and maybe what we're moving towards.

Yeah, certainly.

What was published earlier this week is a response to a consultation that was happened in twenty twenty three.

But I think it's fair to say that the government has been unhappy about the level of AML compliance and reporting with particularly the accounting sector and also the legal sector for some time.

You only need to look back to the twenty twenty National risk assessment, and that referred to one of the greatest risks being accountants that don't take their responsibilities seriously or indeed negligently.

And that was repeated in the twenty twenty five National Risk Assessment.

In twenty nineteen, we had the creation of Obas.

So the office for Professional Body AML supervision to try and bring some consistency and strengthen the approach to compliance by the professional bodies in there.

Andy, you say they were brought in to try and bring some consistency.

I mean, this is maybe going to lead to do you think they were successful in doing that? Well, clearly the government doesn't think that they're successful, hence the consultation in twenty twenty three.

I think certainly from our perspective, we have seen some of the smaller professional bodies becoming more rigorous because we see, as you've indicated, technical queries sometimes, or we carry out compliance reviews.

So we've certainly seen a change of attitude.

But I think from the government's perspective, evidently they weren't satisfied.

So the proposal in twenty twenty three gave four possible options for AML supervision.

The first was called Opus Plus, which is essentially increasing the powers for opus to try and improve the effectiveness of supervision and enforcement.

The second option was the consolidation of some of the professional body supervisors, so particularly some of the smaller ones, there are actually twenty three professional body supervisors.

So that obviously lead to inconsistencies, apparently complicates collaboration with law enforcement agencies because you've got all of these different professional body or AML supervisors to deal with.

So consolidation was an option.

A third option was a single professional services supervisor.

So this would replace all of the professional bodies dealing with accountants or accountancy service providers and legal service providers, to use the jargon from the National Risk Assessment.

And the fourth option was a single AML supervisor overall.

So at the moment, in addition to the professional bodies, we also have HMRC, the FCA and the Gambling Commission.

So this single AML supervisor option would have seen all of those consolidated into one option at one supervisor.

What the government have gone with is the single professional services supervisor, so that will take over from all of the professional bodies.

It will also take over supervision of accountants from HMRC.

So HMRC will continue to be a regulator at the moment for non professionals.

So estate agents, art galleries are the two that it will retain for the moment.

So that's the outcome of the consultation.

So I.c.a.

Acca.

Also the SRA on the legal side will all eventually lose their AML compliance and supervision responsibilities.

Perfect.

No thanks.

I think it's worth just then starting to think about the impact that that will have on sort of our clients and sort of those of you listening to this, you've probably become quite familiar with maybe the supervision approach that your existing professional body takes.

And myself and Andy, which was debating this book before we started.

Now in in theory, the answer should be, well, the regulations as they stand are the regulations, and they should be supervised in the same way.

I think, Andy, as you've touched on there, one of the options was a slightly smaller consolidation option, noting that there is a slightly different approach between the various professional bodies and supervisors to how they actually do monitor and supervise those in the profession.

Clearly, with this single professional services supervisor, easy for me to say.

Approach the one that the government have plumped for.

That is probably the one of the more extreme elements of consolidation to try and bring a lot together under one roof.

Do we think there will be a tangible difference that practitioners will see in the fullness of time? Andy.

I think inevitably the answer to that is yes.

Uh, the FCA is going to be become the single professional Services supervisor.

So the FCA already regulate investment business for compliance.

And we can see with the approach that a lot of investment businesses take is it tends to be a much more of a one size fits all approach, whereas the accountancy regulators tend to emphasize the risk and the response to risk in what is adequate.

So it would be interesting to see how that plays out.

But I think where we've had experience of dealing with HMRC as a regulator, they tend to be look at areas of compliance or where compliance is required and therefore areas of non-compliance.

And if they carry out a compliance visit and there are areas of non-compliance, there are fines.

That's simple and I think that's probably a notable difference.

Again, I've probably got more experience of, say, the Isa as a supervisor, a little bit of experience with maybe the Acca as a supervisor.

It's not to say that they're Uber pragmatic in their current approach, but is it fair to say that the existing supervision by professional bodies that we're familiar with is maybe more of a okay, we can see you've got some issues here, go away, try and improve.

And then if we see repeated non-compliance, they'll maybe up the ante on on escalating the punishment, whereas it's more likely going forward we'll see harsher punishment kick in straight away.

Is that fair? I think that's fair that the certainly we have most experience with ICW as a regulator.

And to start with, they're very much about encouraging and explaining what is required.

But at the end game is the same if you continue, if you persist in not getting it right, the Institute will still take regulatory action and find you quite heavily.

I think what we will see is moving the process by which you get to the end game being much quicker.

Yeah.

It's interesting.

I recall a conversation we had some time ago.

And this is maybe where Hotbars were sort of monitoring the monitoring of the supervisory bodies.

And I seem to recall a criticism that they had of the ICW was, yes, they were pretty in-depth with their monitoring activity, but maybe were a bit too lenient on the issuing of fines and the like.

So I think you can clearly see the appetite from Barton and those in positions of power that they maybe do want more harsher action sooner or wrongly.

Whether we agree with that is that's another matter.

But that's the direction of travel that I think we're going to be going in.

I think that's right.

And that then circles back to the government's view, as expressed in the national risk assessment, that there is a problem with accountants that don't take their AML responsibilities seriously enough.

So a harsher regime, the hope is that will drive accountants to take their responsibilities more seriously.

Absolutely, absolutely.

So we've got this consultation and we've been told what the end answer will be.

Appreciate, I know the answer to this question, but I'm going to ask it in quite a way.

Do we have a roadmap for how we're going to get there? What should firms expect next? There isn't a timeline in the consultation.

What it does refer to is that a consultation will be issued in November on the powers that the new single Professional Services supervisor should have.

But clearly there will need to be a transition, because if we've got twenty three regulators at the moment, bearing in mind HMRC will be losing their regulation of accountants, that's twenty three groups of firms that needs to be moved into the FCA and their supervision.

So it's clearly going to take a little while for the FCA to gear up for this.

The consultation makes it quite clear that they will receive the funding to do so.

And I can see the fact what if the professional bodies are losing their AML responsibilities? They will no longer need those staff.

Therefore, the FCA will be looking for such people.

So I can quite clearly see that some of the supervisory current supervisors in the professional bodies are perhaps going to be moving to the FCA.

That will all take time.

So I would have thought we've got a year or so before things start to kick in, and therefore that's a year or so that firms can do their best to get their house completely in order under the current regime so that they're ready.

When the FCA kicks off with its supervisory approach and you've got all your ducks in a row for there, the FCA's first compliance visit to your firm? Absolutely, absolutely.

I think something that we've mentioned already is in theory, and it's not to say that the AML regulations as they stand won't change.

Clearly, there's been a fairly consistent pathway of evolution in that space over time.

And as you say, there is a consultation out currently on on evolving the regs or there is a consultation.

There was a consultation on the regs.

I think we're expecting draft regulations to be published very shortly.

That will kick in next year.

Yeah.

They don't make any significant changes to the current requirements.

It will be interesting to see whether the government is probably too soon to add anything to those that current version of the changes, but it's quite possible there will be further changes.

Well, there will need to be directly as a result of this change, some structural changes to the regs.

But whether there's anything else of substance we will need to wait and see.

Yeah.

And I think then just with those two together, naturally, even where I think we see this in other spheres that we're operating, maybe in terms of changing auditing standards and other standards that change, even if there's not a substantive change, quite often a freshening of the regulations maybe brings about a fresh perspective from supervisory and monitoring bodies.

Anyway.

And then with the change we're about to see, as we said, potentially with a a much tougher taskmaster being the supervisory body for the profession, as you said, I think now's the time for firms to to really sort of pin down, look at their current working practices, what their current policies, procedures are, documentation that they've got across their client files for client due diligence and ongoing monitoring and the likes, and maybe where they've seen their monitoring body has not given them a free pass, but has maybe given them a pragmatic bit of encouragement before their next monitoring visit.

I think now's really the time to start weeding through those points and getting your house in order, as you said, Andy.

So with that in mind, how can we help? What can we firms get from us to to help them in that quest? Well, as you mentioned at the beginning, Lea, that we provide a compliance review service so we can effectively come into your firm and carry out, if you like, a dummy compliance review of your AML policies and procedures, and to highlight where you've got weaknesses and to it's issues like not taking our manual but not tailoring it properly.

So that's the sort of thing we can point out.

Or you've got the good policies and procedures in place.

But when we actually look at a sample of files, they're not being applied in practice.

And that's actually where the fines are going to rack up.

Those are the sorts of areas that you really do need to make sure that every partner in the firm or every office department is all applying the standards to the same level and doing it properly.

Otherwise it's in due course.

It will get expensive.

Absolutely.

And I think if I think about AML compliance reviews that I've undertaken, not just recently, but over the course of time, I think often the big challenge that I discuss with firms is there they can talk the talk, and they're often comfortable that they're doing what they need to do from an AML perspective.

But as you said, when you actually come to look at what is documented on a client file around understanding their client, does that then support a justification for the risk assessment that's been reached, and then the underlying verification and due diligence that falls off of that.

It's that documentation that is often lacking.

Whilst many firms probably, quite rightly, believe they're doing the right thing in substance, the evidencing of that is what's going to call their cause.

Them to have a bit of a fall down will cause them to have a fall down already, but I think will become a much quicker fall down under the new monitoring regime.

Yeah.

Absolutely.

Perfect.

So yeah.

So we've got our compliance review service again as I mentioned, sort of Andy's author of a, I think a wonderfully helpful manual to help you on your journey to, to develop your policy procedures.

As Andy has hinted at, it does require some tailoring.

Again, you can't just take our manual, put it in a nice folder and pretend it's all good.

It doesn't need you to mould and adapt it to your needs.

But for those of you that maybe don't have formal policies and procedures in place and need some help with that.

That's a good place to go as well.

Andy, you'll be running a number of AML courses and digging into this consultation in a bit more detail and dare I say, keeping people abreast of further news as that trickles down to us.

So if people need help and want to attend the course, keep your eyes peeled for those.

And then, yeah, we're always here to help with our ad hoc TC service as well.

Yeah, I think that about covers everything.

And I don't know if anything else you want to add or feel we've not covered.

No.

Nothing else from me.

Perfect.

Perfect.

Well, thank you for your time.

And I've certainly found that incredibly useful and helpful to, to talk to and hope listeners out there have as well.

Yeah.

And enjoy the rest of your day.

Everybody and myself and Andy look forward to seeing you on a course at the Farm review a compliance review soon.

But thank you for joining me, Andy, and I'll see you soon.

Yeah.

Cheers.

Cheers, everyone.

Thanks, everyone.

Bye bye.

Thank you for listening to the Mercia Podcast.

For more information on this topic, please visit mercia-group.com.