Online Platforms: "Walking" the line between legal and financial services compliance ( Part 5 of 5)

19 August 2019

Anti-money laundering, terrorist financing, and know your client obligations

FCA-authorised firms are required, pursuant to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on Payer) Regulations 2017 (“MLRs”), to implement anti-money laundering (“AML”) measures.  

The AML requirements set out under the MLRs create a number of obligations which would apply to regulated online platforms including:

  • creating internal policies and procedures;
  • carrying out internal risk assessments;
  • creating a system for suspicious activity reporting;
  • training staff;
  • carrying out customer due diligence (“CDD”), enhanced due diligence (“EDD”), or simplified due diligence where necessary; and
  • record keeping.

Online platforms commonly implement some of the following measures to meet AML obligations:

  • filtering customers to avoid “high risk” customers or customers where EDD may be required;
  • preventing persons from certain (e.g. sanctioned) jurisdictions from registering with the service;
  • ·online CDD checks (e.g. by using a picture of a customer and their identification documents);
  • ·online EDD checks (e.g. by using video messaging services to identify and verify customers);
  • creating a digital suspicious activity reporting system; and
  • recording transactions and using algorithms to track fraudulent patterns.

Firms should also be aware that a new anti-money laundering provision, the fifth Money Laundering Directive (“MLD5”) is due to be implemented across member states, including the UK (depending on Brexit), by 2020.  This will create a number of new obligations including which may affect online platforms, including the mutual recognition of the latest developments in electronic identification schemes to allow for quicker and easier due diligence checks.

Financial Promotions

In summary, under FSMA a person is not permitted to issue a “financial promotion” unless the financial promotion is:

  • issued by an FCA-authorised firm;
  • its content approved by an FCA-authorised firm; or
  • falls within the scope of an exemption.

Any contravention of the financial promotion regime is a criminal offence.

A communication will only constitute a “financial promotion” if it satisfies each of the following criteria (as above, if one is not satisfied, then it will not amount to a financial promotion):

  • it is an invitation or inducement (e.g. by marketing);
  • to engage in investment activity (e.g. to acquire or dispose of a “specified investment”, see “Regulatory Permissions” above);
  • in the course of a business (as above, e.g. to make a profit).

Online platforms commonly implement the following measures to help them discharge their financial promotion obligations:

  • creating a “tick box” for investors to certify whether they meet certain conditions, so the financial promotion can be communicated without restriction;
  • categorising customers; and
  • limiting the products available to a customer depending on exemption category.

Firms should also be aware that the FCA issued a “Dear CEO” Letter for all regulated firms earlier this year.  This letter was to remind CEOs that firms carrying out both regulated and unregulated activity are not permitted to issue financial promotions which suggest all their activity is regulated by the FCA.  Online platforms should therefore consider their financial promotions carefully to ensure that they do not misrepresent the scope of their existing permissions.

As published in Butterworths Journal of International Banking & Financial Law, June 2019.

Part 1 Part 2 Part 3 │ Part 4 │ Part 5


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Agency Database

  • Financial Conduct Authority (FCA)
    Term:
    Financial Conduct Authority (FCA)
    Other Names:
    Definition:
    Responsible for consumer protection, market conduct, EU representation & prudential regulation of smaller firms.
    Area:
    Type:
    Regulator
    Country:
    UK
    URL:
    http://www.fsa.gov.uk/
  • Prudential Regulation Authority (PRA)
    Term:
    Prudential Regulation Authority (PRA)
    Other Names:
    Definition:
    To be created Spring 2012 out of the FSA, along with the FCA and FPC (q.v.). Responsible for the micro-prudential regulation of individual firms
    Area:
    Type:
    Regulator
    Country:
    UK
    URL:
    http://www.fsa.gov.uk/about/what/reg_reform/pra
  • Surveillance of the Financial Sector Commission
    Term:
    Surveillance of the Financial Sector Commission
    Other Names:
    Commission de Surveillance du Secteur Financier (CSSF)
    Definition:
    Responsible for financial regulation in Luxembourg. The competent authority for the authorisation and supervision of payment institutions (article 20); and MiFID.
    Area:
    Type:
    Regulator
    Country:
    Luxembourg
    URL:
    http://www.cssf.lu/en/
  • National Securities Commission
    Term:
    National Securities Commission
    Other Names:
    Comisión Nacional del Mercado de Valores (CNMV)
    Definition:
    In charge of supervising and inspecting the Spanish Stock Markets and the activities of all the participants in those markets. The competent authority for MiFID.
    Area:
    Type:
    Regulator
    Country:
    Spain
    URL:
    http://www.cnmv.es/portal/home.aspx?lang=en
  • Financial Services and Markets Authority
    Term:
    Financial Services and Markets Authority
    Other Names:
    Autorité des services et marchés financiers (FSMA)
    Definition:
    Responsible for the integrity of financial markets and fair treatment of financial consumers. Competent authority for issues under MAD. It is the successor of the CBFA (www.cbfa.be) and is the competent authority for the authorisation and supervision of payment institutions; MiFID.
    Area:
    Type:
    Regulator
    Country:
    Belgium
    URL:
    http://www.fsma.be/
  • Commission of the Securities Market
    Term:
    Commission of the Securities Market
    Other Names:
    Comissão do Mercado de Valores Mobiliários (CMVM)
    Definition:
    Established in April 1991 with the task of supervising and regulating securities and other financial instruments markets. The competent authority for MiFID.
    Area:
    Type:
    Regulator
    Country:
    Portugal
    URL:
    http://www.cmvm.pt/en/Pages/default.aspx
  • Czech National Bank
    Term:
    Czech National Bank
    Other Names:
    Česká národní banka (CNB)
    Definition:
    Area:
    Type:
    Regulator
    Country:
    Czech Republic
    URL:
    http://www.cnb.cz/en/
  • Bank of Italy
    Term:
    Bank of Italy
    Other Names:
    Banca d’Italia
    Definition:
    Central bank: banking and financial supervision. The competent authority for the authorisation and supervision of payment institutions (article 20).
    Area:
    Type:
    Regulator
    Country:
    Italy
    URL:
    http://www.bancaditalia.it/;internal&action=_setlanguage.action?LANGUAGE=en

Future Dates

* Estimated date

  • 24 November 2019

    Form K, the conversion form under SM&CR,  must be submitted by 23.59pm on 24 November 2019.

  • 9 December 2019

    The changes set out in the appendices of PRA PS20/19, implementing changes to the prescribed responsibility for recovery and resolution under SM&CR,  will come into force. 

  • 9 December 2019

    PRA Consultation CP20/19 closes.