The Financial Conduct Authority (FCA) has imposed a fine on Barclays Bank Plc (Barclays) for failings in its oversight of its customer, Premier FX.
Premier FX was an authorised payment institution which provided foreign exchange and money remittance services to customers who were mostly UK expats living in Spain or Portugal. Following the death of its sole director and shareholder (Peter Rexstrew) in June 2018, it was discovered that Premier FX was providing services it was not authorised to provide, such as deposit taking. Furthermore, client monies were not properly segregated or safeguarded, resulting in a shortfall in customer funds of over £10m when the company was placed into liquidation. As previously reported, in February 2021 the FCA publicly censured Premier FX for breach of the Payment Services Regulations, and would have imposed a substantial fine had the company not been in insolvent liquidation.
Premier FX had been a Barclays customer from 2006. Barclays provided banking and foreign exchange services from which it earned fees and benefitted from a margin on its currency exchange services.
Barclays recognised Premier FX as a money service business (MSB) presenting a higher risk of money laundering. Barclays conducted periodic AML reviews of its MSB customers which required them to meet minimum standards. These minimum standards included a requirement that the MSBs maintained robust internal controls to segregate client funds from company funds.
The FCA found that Barclays breached Principle 2 of the FCA's Principles for Business by not acting with due skill care and diligence in carrying out its ongoing monitoring of Premier FX during the relevant period. The failures included:
- Barclays failing to finalise in a timely manner reviews of Premier FX in two calendar years. This was due to delays on the part of Premier FX, but which were not followed up by Barclays.
- Reviews undertaken were of poor quality with mistakes cut and pasted from one year to the next.
- Barclays failed to challenge information provided by Mr Rexstrew or identify risks inherent in a business reliant on one individual.
- Barclays failed to make appropriate enquiries about the use (and misuse) of a number of accounts opened by Premier FX.
- Barclays did not do enough to ensure that client funds were properly segregated by Premier FX.
- Barclays failed to make sufficient enquiries into the capital position of Premier FX.
The FCA imposed a penalty on Barclays based upon the revenue generated by Barclays from Premier FX during the relevant period (£1,197,677). On its five point scale of seriousness, the FCA assessed the failings to be level 3 which would equate to 10% of relevant revenue. However it also determined that this would be insufficient to act as a deterrent and accordingly increased the penalty by £1,000,000 to £1,119,767 before applying its usual 30% discount for early settlement.
For a bank like Barclays this still represents a tiny sum compared to other fines imposed on Barclays by the FCA (ranging from £26m to £284m). However, a factor which the FCA did take into account was that as part of the settlement Barclays agreed to make an ex gratia payment to be distributed to all customers of Premier FX who lost money.
MSB's are considered to present a higher risk to banks because features of the MSB sector make it an attractive vehicle through which criminal and terrorist funds can enter the financial system. The Joint Money Laundering Task Force (JMLSG) which devotes a whole chapter to MSBs in its statutory guidance considers that MSBs can be used for money laundering and terrorist financing in two ways: either by wittingly or unwittingly performing relevant transactions for their customers without knowledge of the illegal origin or destination of the funds concerned, or by a direct involvement of the staff/management of the provider through complicity or through the ownership of such businesses by a criminal organisation.
However, in the case of Premier FX, it was not money laundering by customers that amounted to financial crime, it was wrongdoing committed by Premier FX on its own customers. The case is therefore a reminder to banks that due diligence on their financial services clients must extend beyond merely ensuring that their customers' own AML controls are effective.
Absent from the final notices for Premier FX and Barclays is any criticism or assessment of the role of the FCA as regulator of Premier FX. What is clear from the Barclays notice is that the FCA expects bankers of regulated firms to undertake some of the due diligence and monitoring which one might expect a regulator to undertake – including assessing the business model, identifying and managing risks associated with a single director/owned business, determining whether the firm's activities are properly reflected in its permissions and monitoring capital adequacy.
Nevertheless, submissions from the Premier FX Liquidation Committee to the Treasury Select Committee were that the FCA failed in its regulation of Premier FX, including an allegation that "The FCA first authorised PFX in 2013 when they were already trading insolvent and skimming off customers’ remittances".
JMSLG guidance provides that UK MSBs present a lower level of risk than MSBs which are unregulated and based overseas. However, whilst FCA regulated business are lower risk, they are not "no-risk" and firms should not assume that FCA regulation and supervision is effective in ensuring their customers are compliant.
Luckily for the FCA, the ex gratia payment by Barclays will mean Premier FX customers are reimbursed in full for their losses. The FCA gets another opportunity to educate banks through enforcement and avoids having to deal with complaints of regulatory failure from customers seeking recompense (such as those it is dealing with from investors in London Capital and Finance, as reported on and criticised by the Complaints Commissioner here).