Learning to live with FSA rules

As the Financial Services Authority throws its weight behind money laundering measures, Alison Matthews explores the ins and outs of the new legislation and how it affects solicitorsOn 1 December 2001 (N2), the Financial Services and Markets Act 2000 (FSMA) comes into force and the Financial Services Authority (FSA) becomes the single financial services regulator in the UK.Solicitors' firms conducting mainstream investment business will be preparing for FSA authorisation by assessing the FSA Handbook and implementing the changes that will be required to comply with the FSA's rules, including the FSA's money laundering rules.Designated professional bodiesMost firms conducting 'exempt regulated activities', that is, non-mainstream investment business, will not be authorised by the FSA and should be familiar with the Law Society's guidance on the designated professional body (DPB) regime.

Such firms will not be subject to the FSA's money laundering rules and will remain subject to the Money Laundering Regulations 1993.

These regulations currently refer to 'investment business' as defined by the Financial Services Act 1986.

However, they are being amended to refer to 'regulated activities' in the light of the new definitions within FSMA.

DPB firms will probably provide a mix of exempt regulated activities plus activities that are subject to exclusions in the Regulated Activities Order.

The latter are not, technically, subject to the regulations.

As it may often be difficult to know, particularly in advance, what type of activity will be provided, it would be sensible for DPB firms to adopt a policy to comply with the regulations in all matters where investments - for example, shares, unit trusts, life policies - are involved.

Many firms already follow the Society guidance and apply the regulations to a wider range of work than investment business, particularly where the work they undertake is susceptible to money laundering.

The Second European Money Laundering Directive will soon mean that the regulations will apply to a wider range of services provided by solicitors, and so applying them more broadly now will help in the future.The FSA's rulesThe reduction of financial crime is one of the FSA's four principal objectives.

The terrorist attacks of 11 September will mean that the FSA will take this objective particularly seriously.

Firms should consider the money laundering rules carefully.

It is important to note that the new regime is parallel but separate to the Money Laundering Regulations 1993 and the substantive law, but the FSA's rules are similar to the regulations.

The joint money laundering steering group's (JMLSG) guidance notes, which are regarded as the industry standard, have been revised to take account of the new FSA rules.

An up-to-date copy should be on the bookshelf of every money laundering reporting officer (MLRO).

The key requirements:Money laundering reporting officer l Existing MLROs do not need to be reappointed.

l Firms must have effective anti-money laundering systems and controls in place, and the new money laundering rules refer to other parts of the FSA Handbook, for example, the principles, the code of practice for approved persons, senior management arrangements, and training and competence.

l Firms must set up and operate arrangements to ensure compliance with the FSA's rules, including the appointment of an MLRO.

If there is not a MLRO, one must be appointed.

The MLRO must be an employee with sufficient seniority and resources.l The MLRO will oversee the firm's anti-money laundering activities and will be the key person in the implementation of those strategies and policies.

The MLRO must be an 'approved person' and their details must be included in the controlled functions list, which must be provided to the FSA by 30 November 2001.l The rules place detailed requirements on the MLRO, including making an annual report to senior management, compliance monitoring, record-keeping, and liaison with the National Criminal Intelligence Service (NCIS).

l The MLRO must have access to their firm's information in deciding whether or not to make a report to NCIS.

Should a decision be made to make such an NCIS report, it must be made promptly.

Client identityl There are transitional provisions for relationships with established clients.l Firms must verify the identity of their clients so that they can show that the clients are who they say they are.

Compliance with the revised JMLSG guidance notes will help to show compliance with rule 3.1.3.

If the client is either acting on behalf of another, or appears to be acting on behalf of another, the firm will need to verify the identity of both individuals.

There is also FSA guidance for firms whose clients may be 'financially excluded', that is, those who cannot reasonably be expected to produce detailed evidence of their identity.l Evidence of identity needs to be obtained as early as possible in the firm's discussions with the client.

If it is not supplied the firm must discontinue any regulated activity it is conducting for the client and terminate the retainer unless a report has been made to NCIS.

There are exceptions which are similar but not identical to those in the regulations.Generall Firms must take reasonable steps to ensure that relevant staff make prompt reports to their MLRO where there is a knowledge or suspicion of money laundering.

It is clear from the rules that the FSA expects firms to discipline staff who fail to make such a report, unless the member of staff has a reasonable excuse.

l Firms must obtain and consider any government or financial action task force findings.

Findings are available on the FSA's Web site.

This is a new requirement.l Firms must take reasonable steps to ensure that staff are properly trained and made aware of their responsibilities under the firm's arrangements.

The firm must keep a record of the training given, when and to whom.l All records must be kept for five years.

This includes details surrounding a situation where a firm considers whether to make an NCIS report, but ultimately decides not to report.

The firm must record why it initially thought that an NCIS report might be appropriate, all of the factors which were taken into the decision-making process, and details of why a decision was made not to report along with the staff who took the final decision.Among other things, the aim of this FSA project was to assess the current level of compliance within the financial industry, identify the sectors subject to the greatest risks and raise the profile of money laundering.

The theme document identifies key gaps in current compliance, but also provides examples of good practice.

The theme document is available on the FSA Web site.Firms facing FSA regulation should consider the detail of the FSA's rules, obtain the JMLSG guidance notes, and ensure that their MLRO has adequate resources to ensure that their firm complies with the new rules.LINKS: www.lawsociety.org.uk Law Society guidance on money laundering www.

fsa.gov.ukAlison Matthews is compliance officer at national law firm Irwin Mitchell and a member of the Law Society's serious fraud and money laundering task force