Anti-money laundering controls are one of three key areas for wealth managers to focus on in the opinion of John Griffith-Jones, chairman of the UK’s Financial Conduct Authority. The other two areas are suitability of investments and the effect of the Retail Distribution Review on the fund industry.
The message from the FCA, as it seeks to improve the overall integrity of the marketplace, seems clear: wealth managers need to up their game and take AML controls more seriously. Better record keeping and regular client reviews are necessary, not only to address the point concerning product suitability but to ensure that they don’t get blindsided by clients and overlook potential financial crime.
After all, as the industry’s gatekeepers, investment managers rely on wealth advisers to effectively screen potential investors coming into their funds.
“One of the biggest risks in the wealth space is that advisers get too close to their clients and cannot see the wood for the trees,” Mark Spiers (pictured), Head of Wealth Management at Bovill, a regulatory consultancy firm, tells Wealth Adviser. “The advantage of wealth managers is that they have a trusted adviser relationship with their clients, which is a significant plus point for the industry. But the flip side to that is that if they do have a client who turns out to be in possession of the proceeds of crime, they may be unable to provide the effective financial crime risk controls one would hope.”
Objectivity is therefore critical. And as Spiers points out, the wealth management space is not just about providing the right product to the right client at the right time, it’s about ensuring that the clients themselves are suitable i.e. doing the necessary fact finding and due diligence to ensure that they are not engaged in financial crime.
Right now, regulation requires regulated firms to have AML and terrorist financing risk assessments in place but these are not the only financial crimes. “There’s also fraud risk, market abuse, information security. The FCA is pushing for firms to have an assessment of all financial crime risks not just anti-money laundering, terrorist financing and bribery.
“If and when someone gets penalized for a market abuse problem and they haven’t done and acted on a risk assessment it’s going to be used as a stick to beat the senior management with,” says Spiers.
It could be that regulation such as FATCA, which will require investment managers to have far more granular detail on the tax status of each individual investor, will help strengthen AML checks within the wealth management space; either because wealth advisers will be forced to comply with FATCA by product providers or because they themselves will have an obligation to comply with FATCA directly.
“People might start to use FATCA as an additional contact point with clients and could lead them to update the rest of their client information at the same time,” adds Spiers.
With more accurate, up-to-date records on clients the threats to financial crime entering the marketplace should be mitigated going forward. It will also help firms avoid potential penalties for failing to keep accurate records like the GBP3million fine imposed by the FCA on a JP Morgan unit in May.
“There have been lots of fines in the AML space for similar reasons. Even if there is no evidence of financial crime going on, if firms don’t keep records correctly up-to-date they still run the risk of getting penalized.”