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Laundering rules to go through a hotter cycle

The FSA has announced its intention to expand the money-laundering regulations for the financial services industry in an attempt to strengthen measures guarding against abuse of the system.

While the first reaction of IFAs has been concern that such requirements may be even more onerous than the current regulations, the attitude that the FSA appears to be adopting is encouraging.

Rather than utilising a broad-brush approach to expansion of the requirements, the FSA hopes to look at each area of the industry individually.

The FSA regards its regulatory approach as that of overseeing how the rules are implemented, leaving the detailed guidance to trade bodies such as the ABI, BBA and Aifa.

Spokesman Patrick Humphris says: “The beauty of the system is its high-level approach. We want to keep the rules quite simple and high level.”

What this means is that, rather than treat IFAs the same as big institutions such as banks or life offices, the FSA will consider their situation on its merit.

Advisers, for their part, appear keen to work with the regulator in the hope that they can negotiate the least onerous settlement possible and because they want to work with the FSA to catch out criminals.

Chase de Vere Investments compliance executive Matthew Saint has volunteered to join the working party being established by Aifa to work with the FSA in designing the new regime. He says: “I definitely think we are going in the right direction. I do not think the rules being proposed are too onerous. There is a risk that money generated from illegal means is being invested illegitimately. The way the FSA is proposing to go forward with this makes a lot of sense.”

In advance of a consultation paper to be published later this autumn, the FSA says it wants to engage in discussions with various representative bodies of the industry.

There appear to be two aims in taking the regulations forward. First is to remove the pre-1994 exemption, thereby compelling the industry to revisit cases on file before that year to ensure adequate documentation or identification exists.

Kingsbridge Holdings compliance manager James Deacon says: “I am not sure that removing the exemption is a major cause of concern for us. As a company policy, we conduct money-laundering checks for all our clients as a matter of course.”

The question for IFAs is whether the industry will have to revisit both active and dormant clients or only those they still do business with.

In July, five of the biggest clearing banks, HSBC, Royal Bank of Scotland, Barclays, HBOS and Abbey National, launched a joint initiative to revisit all their clients to ensure adequate identification exists.

A potential worry for IFAs is that the FSA may look at what the banks are doing and extend similar demands to the rest of the industry. The FSA has said it is attracted to the template rolled out by the banks and would like to use it as a basis for reform across the industry. Compared with banks, the amount of capital available to IFAs is limited, which is why such a move is causing concern.

Momentum Financial Services compliance manager Steve Davie says: “I have the feeling that the FSA will extend what the banks are doing to the rest of the industry. If that is the case, it will be a massive exercise in contacting all our clients.”

But Humphris says, while the regulator likes the approach of the banks, it does not see any point in revisiting long-dormant clients.

Another area of regulatory expansion that may be on the cards deals with new business. Instead of simply filling out a form attesting to the fact that documentation exists, IFAs will have to physically pass the documentation on to providers.

Deacon says: “Going forward, it is a very bureaucratic approach they are discussing and this is worrying. They are expecting us to pass on information to providers for all new business going forward, which is yet another cost we face.”

In fact, as of September 1, IFAs will be required to forward client information to providers for all new business. The form in which they do this is very strict, in accordance with guidelines set out in a new agreement between Aifa, the ABI and the BBA.

Many IFAs have expressed their opposition to the money-laundering requirements because there is an element of doubling up. They claim that, because the vast majority of them are not regulated to handle client money, the funds they invest tend to be in the form of cheques from UK banks. The writers of these cheques have presumably been through the money-laundering controls at the banks, so they claim there seems to be little point in compelling IFAs to go through the process again.

Aifa says, while it understands the FSA&#39s approach to tackling money laundering, it cannot agree that the same requirements should be extended across the whole market and not just on investment business where any laundering is most likely to occur.

One area of thinking is that there is very little chance that anyone would attempt to launder money through areas of business such life, pensions and protection products.

Aifa technical officer Linda Chandler says: “It can seem disproportionate to IFAs that they have to jump through all these hoops for relatively small amounts of business. Saying that, the noises the FSA has been making towards IFAs have been encouraging.”

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