The consultation sets out four potential models for reform, and also considers reform to sanctions supervision.

By Rob Moulton, Jonathan Ritson-Candler, Thomas F. Lane, and Charlotte Collins

On 30 June 2023, HM Treasury published a consultation on reforms to anti-money laundering (AML) and counter-terrorism financing (CTF) supervision in the UK. HM Treasury is consulting on structural reforms to how AML and CTF requirements on firms are supervised and enforced, but is not consulting on changes to the AML and CTF requirements themselves at this stage. A separate consultation on changes to the Money Laundering Regulations is expected in late 2023.

One of the options HM Treasury has proposed could significantly impact the way in which financial services firms are supervised for AML/CTF purposes, and so firms should read and consider the proposals carefully.

Background to the Consultation

The Financial Action Task Force (FATF) 2018 evaluation of the UK expressed concerns regarding potential deficiencies in risk-based supervision by AML/CTF supervisors. Following these concerns, the government created the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) to oversee the various professional body supervisors (PBSs) in the UK.

In February 2022, the Treasury Select Committee recommended consideration of “radical reforms” to the supervisory system, commenting on the difficulties OPBAS had experienced since its creation. This recommendation led to HM Treasury’s 2022 Review of the UK’s AML/CTF regulatory and supervisory regime. The Review concluded that some weaknesses in supervision may need to be addressed through structural reform, and set out four possible models for a future supervisory system. The four models in the present consultation build upon the suggestions made by the Review.

In preparing this consultation, HM Treasury undertook some international benchmarking, reviewing the supervisory systems of other G7 and G20 nations that had received positive FATF feedback. Its work found that the most consistent identified weaknesses in these systems related to non-financial sector AML supervision, as is the case for the UK, and the lack of sufficiently dissuasive enforcement action by non-financial sector supervisors. Therefore, in HM Treasury’s view, no single system reviewed is a clear frontrunner, hence its request for industry feedback on a range of models.

The Four Proposed Models

Three of the four models set out in the consultation would not involve any change to the role or remit of the FCA as AML/CTF supervisor for financial services firms. Instead, they would focus on the role of OPBAS and the PBSs (with options ranging from enhancing OPBAS’ powers, to creating a single PBS).

However, the fourth (and most radical) model proposed would involve all AML/CTF supervision (for all sectors, including the financial services industry) in the UK being undertaken by a single, new, public body. Under this model, the FCA would stop supervising financial services firms for AML/CTF compliance. The new public body would likely operate independently of any ministerial department, but remain accountable to HM Treasury.

The creation of a single AML/CTF supervisor would require all financial services firms to deal with multiple regulators. While the FCA (and PRA, if applicable) would continue to regulate firms for other matters, firms would also be supervised by the new AML/CTF supervisor. The consultation discusses some potential advantages and disadvantages of this approach, including the potential improvements in the monitoring of threats and risks across all sectors, against the lack of sector-specific knowledge that a single supervisor would have.

The fourth model would be a significant change for financial services firms. Whilst dual-regulated firms are already used to dealing with two regulators for different matters, this requires a high level of coordination between the FCA and the PRA, and so any new AML supervisor would have to work closely with the regulators. Such close collaboration would be particularly important as the new supervisor might not necessarily understand firms’ business models or industry practices and would not be aware of relevant sectoral trends that might affect AML/CTF compliance.

Sanctions Supervision

The consultation also raises the question of whether some reform of sanctions supervision may be required, in light of the increased number and complexity of UK sanctions, particularly after the invasion of Ukraine. At present, AML/CTF supervisors do not have the power under the Money Laundering Regulations to review firms’ sanctions systems and controls in relation to sanctions other than asset freezing provisions. Consequently HM Treasury suggests that, in taking forward one of the AML/CTF supervisory models proposed by the consultation, the government considers what enhancements to sanctions supervisory powers are necessary.

Next Steps

The consultation closes on 30 September 2023, and a policy statement is expected in Q2 2024. HM Treasury does not express any policy preference in its consultation, and invites views on which of the four options proposed would most improve the regime.