The Financial Conduct Authority’s (FCA) recent report on Money Laundering Through the Markets (MLTM) provides critical insights into ongoing vulnerabilities in the wholesale broker sector. As financial crime risks evolve, the FCA highlights persistent gaps in compliance and offers clear steps for firms to enhance their anti-money laundering (AML) systems. This article explores the key findings, implications for firms, and recommended actions to mitigate ML risks effectively.

Overview of the Review

Wholesale brokers are critical in the UK’s capital markets, facilitating liquidity, price discovery, and trading across asset classes. However, their central position and discretion in executing trades expose them to significant ML risks. This review, which builds on the FCA’s 2019 thematic review (TR19/4), evaluated firms’ financial crime systems, focusing on business-wide risk assessments (BWRAs), customer due diligence (CDD), transaction monitoring (TM), governance, and suspicious activity reporting (SAR).

The FCA engaged with market participants, law enforcement, and industry bodies to identify risks and assess firms’ progress since the 2019 review. Many brokers have failed to implement robust controls despite advances, leaving gaps that criminals can exploit.

Key Findings

1. Underestimating Risks in Risk Assessments

The FCA identified deficiencies in how firms assess and document risks in their BWRAs. Many failed to tailor assessments to their specific business models, relying instead on generic templates. Some firms overlooked risks from terrorist financing (TF) and proliferation finance (PF), and others failed to update risk assessments following significant changes, such as entering new markets or onboarding high-risk customers.
Customer Risk Assessments (CRAs) also revealed weaknesses. While firms considered factors like geography and customer type, methodologies were inconsistently documented, and rationales for risk ratings were often unclear. Some firms automatically categorised regulated entities as low-risk without assessing other relevant factors, such as jurisdictional or structural risks.

2. Governance and Oversight

The FCA raised concerns about weak governance structures, particularly in smaller firms. Senior management often lacked a clear understanding of financial crime risks and sometimes held dual roles that undermined independence. Effective governance, including robust challenge and oversight, was lacking in several firms.
However, some positive practices were noted, including monthly reporting on AML statistics, proactive risk committees, and independent quality assurance (QA) reviews of policies and procedures.

3. Transaction Monitoring Challenges

Transaction Monitoring (TM) remains a significant challenge for many firms. Key issues include:

• a reliance on generic or outdated TM systems that fail to consider the specific risks of capital markets;
• poor integration of KYC data into TM processes, limiting the identification of suspicious patterns;
• a high volume of false positives overwhelming compliance teams; and
• despite overlapping objectives, there is limited collaboration between TM and Trade Surveillance (TS) teams.

The FCA observed that firms often detect market abuse more effectively than ML risks. Enhanced collaboration between TS and TM functions, including joint training and shared risk assessments, is needed.

4. Inconsistent Suspicious Activity Reporting

SAR submissions from wholesale brokers remain low, with nearly 75% of firms reporting no SARs in the last five years. This raises concerns about underreporting and a lack of awareness regarding SAR obligations. The FCA also noted inconsistent use of the XXMLTMXX SAR glossary code, which is essential for identifying trends and enabling law enforcement investigations.

5. Training and Resourcing

While most firms provide annual financial crime training, the FCA found significant variations in quality and relevance. Many training programmes lack tailoring to specific business risks or roles. Inadequate resourcing of compliance teams was another common issue, with some firms underinvesting in AML functions despite business growth.

Implications for Wholesale Brokers

These findings highlight a pressing need for firms to reassess and strengthen their financial crime controls. Non-compliance with AML regulations exposes firms to regulatory scrutiny, reputational damage, and monetary penalties. Moreover, the increasing sophistication of money laundering typologies in capital markets requires firms to stay ahead of emerging risks.

The FCA expects firms to adopt a proactive and collaborative approach to combatting ML. This includes:

  • regularly reviewing and updating risk assessments to reflect the latest typologies and business changes;
  • enhancing transaction monitoring systems to incorporate customer data and market-specific risks;
  • investing in governance structures that promote independent oversight and accountability; and
  • building a culture of compliance through tailored training and adequate resourcing.

Recommendations and Next Steps

The FCA has set clear expectations for wholesale brokers to improve their AML frameworks. Firms should prioritise the following actions:

1. Revise Risk Assessments

  • Develop tailored BWRAs and CRAs considering specific business risks and customer profiles.
  • Document the rationale for risk ratings and integrate these assessments into broader compliance processes.
  • Regularly review and update risk assessments to address business or regulatory environment changes.

2. Strengthen Governance

  • Ensure senior management fully engages in AML oversight and understands the firm’s risks.
  • Establish independent quality assurance processes to identify and address gaps in systems and controls.
  • Document and review all customer onboarding decisions (especially when the firm relies on other market participants), high-risk transactions, and compliance measures.

3. Enhance Transaction Monitoring

  • Invest in TM systems that align with the complexities of capital markets and reduce false positives.
  • Integrate KYC data into TM processes for a holistic view of customer activity.
  • Promote collaboration between TM and TS teams through joint training, shared management information (MI), and regular meetings.

4. Improve SAR Reporting

  • Familiarise teams with the XXMLTMXX SAR glossary code and ensure its correct use in reporting.
  • Document the rationale for submitting (or not submitting) SARs, including how SAR trends influence risk assessments and customer reviews.
  • Participate in industry forums to share intelligence and improve SAR quality.

5. Invest in Training and Resourcing

  • Provide role-specific AML training that incorporates real-world case studies and emerging typologies.
  • Allocate sufficient resources to compliance teams to manage onboarding, monitoring, and investigations effectively.
  • Establish formal policies and procedures to ensure consistent compliance practices across the firm.

How C&G Regulatory Solutions Can Help

At C&G Regulatory Solutions, we understand the complexities of ML risks in capital markets. Our consultants bring extensive experience as Chief Compliance Officers (CCOs) and Money Laundering Reporting Officers (MLROs) in this sector. We have recently conducted in-depth AML reviews for several wholesale brokers, identifying gaps and implementing practical solutions.

Our expertise ensures your firm complies with FCA standards while enhancing operational efficiency. We specialise in:

  • conducting comprehensive risk assessments tailored to your business model;
  • reviewing and optimising governance structures to promote accountability;
  • enhancing transaction monitoring systems to detect and mitigate ML risks; and
  • providing tailored training programmes to equip your teams with the necessary knowledge.

Conclusion

The FCA’s review underscores the urgent need for wholesale brokers to address weaknesses in their AML frameworks. As regulatory expectations rise, firms must adopt a proactive and collaborative approach to reduce ML risks and protect the integrity of capital markets.

C&G Regulatory Solutions is uniquely positioned to guide you through these challenges. Contact us today to ensure your AML systems meet the highest standards of compliance and effectiveness.

References

  1. FCA Review on Money Laundering Defences in Wholesale Brokers
    Financial Conduct Authority, FCA Review Finds Gaps Remain in Brokers’ Money Laundering Defences.
    Web address: https://www.fca.org.uk/news/press-releases/fca-review-finds-gaps-remain-brokers-money-laundering-defences
    Accessed: 23 January 2025.
  2. Money Laundering Through the Markets (MLTM) Report
    Financial Conduct Authority, Assessing and Reducing the Risk of Money Laundering Through the Markets.
    Web address: https://www.fca.org.uk/publications/corporate-documents/money-laundering-through-markets
    Accessed: 23 January 2025.
  3. TR19/4 – FCA Thematic Review on Financial Crime Controls in Capital Markets
    Financial Conduct Authority, Thematic Review TR19/4: Understanding the Money Laundering Risks in Capital Markets.
    Web address: https://www.fca.org.uk/publications/thematic-reviews/tr19-4-understanding-money-laundering-risks-capital-markets
    Accessed: 23 January 2025.