Which asset finance (leasing) businesses need to be registered for money laundering supervision, and with whom?

Last week, the FCA published concerns about unregulated lenders including financial leasing companies that haven't been registered for anti-money laundering purposes under the 'Annex 1' rules (see https://www.fca.org.uk/news/statements/fca-applying-increased-scrutiny-annex-1-firms). It said it was also concerned about risks it has identified among Annex 1 firms, in particular the potential for them to facilitate financial crime.

This appears to have resulted in a flurry of activity in the market, with larger lenders asking firms they fund to confirm their registration with the FCA and their AML policies and procedures.

Who exactly needs to register? Well the high-level online guidance isn't exactly clear. Here's my understanding..

Firms already authorised and regulated by the FCA do not need to re-register for money laundering supervision. Their money laundering supervisor is the FCA.

That is, I think, clear so I won't expand on it. 

Most asset finance (leasing) businesses that are not FCA-regulated, do need to register for money laundering supervision with the FCA, unless they don't

It might well seem logical to start with the official Government guidance, Who needs to register for money laundering supervision? (https://www.gov.uk/guidance/money-laundering-regulations-who-needs-to-register#businesses-covered-by-the-regulations)

This states that the regulations requiring firms to be supervised apply to "a number of different business sectors, including...financial service businesses'. 

It goes on to say: "Every business covered by the regulations must be monitored by a supervisory authority. Your business may already be supervised, for example, because you’re authorised by the Financial Conduct Authority (FCA) or belong to a professional body like the Law Society. If not, and your business falls into one of 9 business sectors, you’ll need to register with HMRC'. None of the 9 business sectors listed include asset finance (leasing). 

It's confusing guidance, as it could be read as suggesting that firms not authorised by the FCA only need to be supervised (and by HMRC, not the FCA) if they are in the 9 listed business sectors. But that's not the case, as we will see. 

Let's look instead at the guidance from the FCA. 

The FCA states that firms offering credit agreements for immoveable property, financing commercial transactions and financial leasing must register with the FCA as an Annex 1 financial institution (https://www.fca.org.uk/firms/financial-crime/money-laundering-terrorist-financing/registration). 

The FCA guidance does refer rather vaguely to the need for the activity to be carried out as a business activity, referring to whether the activity is carried out with a 'commercial element' and for 'commercial benefit', how often it is carried out, and its fit with other business activities. But none of these sound like they would exclude leasing businesses.

So it seems the Government guidance points to no leasing businesses that are not FCA-authorised needing to be registered for money laundering supervision, whereas the FCA guidance points to all leasing businesses not FCA authorised needing to be registered.

To resolve this, we need to review the underlying law, which is contained in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (https://www.legislation.gov.uk/uksi/2017/692/contents).

This sets out in Chapter 1 Section 10 the definition of the 'financial institutions' that will be supervised by the FCA for money laundering purposes. Paragraph 2(a) states this will include firms that carry out 'one or more listed activities' Schedule 2 to the Regulations is a list of the 'listed activities' and it includes lending and Financial leasing. 

A few exemptions apply, but they are limited

But that's not quite the end of it. Chapter 1 Section 15 of the Regulations list exclusions, and these include:

• Total annual turnover in respect of the financial activity does not exceed £100k

• Financial activity does not exceed 5% of total annual turnover

• Financial activity is ancillary and directly related to a main activity

I'm not a lawyer so would suggest firms obtain professional advice if seeking to rely on any exclusions, but would note that turnover for financial leases here is likely to mean interest charged (i.e. not total lease income, to follow the financial accounts). So that might suggest a book of less than perhaps £1m might be excluded. Also firms that carry out some lending as a secondary activity to unregulated credit broking (i.e. they are not FCA authorised) would be out of scope. 

Update 12 August:  Note that in theory all of the conditions for exemption must apply for an automatic exemption to apply, including a maximum transaction size of just £1k, so the chances of qualifying are minimal. However, from the FCA's guidance, it appears the FCA has some discretion to take a more proportionate appraoch. 

So what's the bottom line? Leasing businesses that are not already FCA authorised should apply for FCA supervision, unless they satisfy themselves that one of the few and very limited exemptions apply. 

Unfortunately for those now looking to apply as Annex 1 firms, what used to be more or a less a tick-box application is now likely to be a more difficult process. 

A key requirement will be for an AML policy that makes sense for the business. Here are my top tips:

• Be wary of using an off-the-shelf policy that won't be specifically relevant to leasing, instead making sure the policy links to the very useful Joint Money Laundering Steering Group guidance on leasing. 

• Consider the firm's risk appetite, e.g. there's little point having sections dealing with enhanced due diligence checks for high-risk countries if the credit policy means no applications would even be considered anyway. 

• Even if excluding higher-risk cases requiring enhanced due diligence, as above, ensure the policy is risk-based rather than 'one-size-fits-all'. 

• Be ready to show that the policy is working effectively.

I hope, in a small way, these details assist firms caught up in the uncertainty arising from last week's FCA announcement. Comments on the LinkedIn post are always welcome.