HM Treasury Consults UK Government on AML Supervision Reforms

HM Treasury announced that a consultation would be conducted concerning AML/CFT supervision reforms, as well as structural reforms required for firm supervision and policy enforcement in the United Kingdom.

HM Treasury issued a consultation paper on June 30th 2023, regarding reforms to the supervision of AML/CFT. HM Treasury will not reform AML and CTF requirements at this stage, but structural reforms to firm supervision and enforcement are under consideration. The Money Laundering Regulations will undergo a separate consultation later on this year.

Financial services firms should carefully review and consider one of the options proposed by HM Treasury as it may significantly impact their AML/CTF supervision. AML/CTF supervisors have been criticised by the Financial Action Task Force (FATF) for potential deficiencies in their risk-based supervision. The government established several professional body supervisors (PBSs) in response to these concerns.

Since its inception, the Treasury Select Committee recommended “radical reforms” to the supervisory system in February 2022 regarding OPBAS’ difficulties. AML/CTF regulatory and supervisory reforms were implemented following HM Treasury’s 2022 Review of the UK’s AML/CTF regime. The review concluded that structural reform may be necessary to address several weaknesses in supervisory systems and suggested four possible models for the future. 

HM Treasury conducted a study of the supervisory systems of other countries that had received positive FATF feedback in preparation for this consultation. Its work recognised that AML supervision in the non-financial sector was the most consistently identified weakness in these systems, as in the UK, and that non-financial sector supervisors lacked sufficient dissuasive enforcement action. Accordingly, HM Treasury believes there are no clear frontrunners among the systems reviewed, so it is seeking industry feedback on various models.

AML/CTF supervisory roles and responsibilities for financial services firms would not be altered by three of the four models presented in the consultation. As far as the role of OPBAS is concerned, they are expected to concentrate on the PBSs (ranging from enhancing the capabilities of OPBAS to creating a single PBS).

One of the most radical (and least expensive) models involves a single, new public body that oversees all AML/CTF activities in the UK (including the financial services sector). The FCA would no longer supervise financial services firms for AML/CTF compliance under this model. HM Treasury would remain accountable to the new public body but remain independent of all ministerial departments.

There would be multiple regulators for financial services firms in the event of the creation of a single AML/CTF supervisor. It should be noted that the FCA (and PRA, if applicable) will continue to regulate firms in other areas, but new AML/CTF supervisors will also supervise firms. It is difficult for a single supervisor to monitor threats and risks across all sectors due to the absence of sector-specific knowledge. Nevertheless, this approach has the advantage of monitoring threats and risks across various sectors.

Financial services firms would see a significant change due to the fourth model. The FCA and PRA must work closely with an AML supervisor to meet this rule’s requirements. For dual-regulated firms, coordinating between two regulators is already familiar; however, the two regulators must coordinate well for this to work. Due to the lack of knowledge of relevant sectoral trends that may affect AML/CTF compliance, such close collaboration would be particularly important.

As UK sanctions have grown increasingly complex and numerous following the invasion of Ukraine, the consultation also raises the question of reforming sanctions supervision. Under current Money Laundering Regulations, AML/CTF supervisors have no authority to review companies’ sanctions systems and controls beyond asset freezing provisions. To that end, HM Treasury recommends that the government consider enhancing sanctions supervision powers when taking forward an AML/CTF supervisory model.

During Q2 2024, a policy statement is anticipated after the consultation closes on September 30th, 2023. HM Treasury’s consultation has not expressed policy preference, but the Treasury invites stakeholders to suggest which of the four options would be the most effective.

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