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The FCA has introduced a significant update in its Handbook Notice No. 125, effective from January 17, 2025. This update introduces a change to controller forms to “introduce criminal background checks for owners and controllers at the authorisations gateway”. Outlined below is a detailed look at the new requirement and its implications.

Background and Rationale

The introduction of criminal background checks aligns with the Financial Action Task Force (FATF) recommendations. The FATF, an international body setting standards for anti-money laundering and counter-terrorist financing, identified the need for more comprehensive checks to prevent criminals from owning or controlling financial institutions. Previously, the FCA conducted these checks on a risk-based approach, only when specific concerns arose. However, the FATF deemed this approach inadequate.

Key Details of the New Requirement

• Scope: The requirement applies to all new authorisation applications and Change in Control (CiC) notifications. Firms must confirm that a criminal background check from the Disclosure and Barring Service (DBS), or the equivalent for persons outside of England and Wales, has been conducted within the previous six months on owners and controllers prior to submitting the application or notification to the FCA.
• Implementation: The FCA may request a copy of the DBS certificate on a case-by-case basis following the review of an application or notification.
• Objective: This measure aims to enhance the FCA’s assessment of controllers, improve market integrity, and protect consumers. It also serves as a deterrent to individuals who might otherwise withhold adverse information.

Consultation Feedback

The FCA received nine responses to the consultation, with mixed opinions:

• Proportionality: Some respondents questioned the necessity and proportionality of the new checks, arguing that the FCA already had adequate powers to request checks when needed.
• Comparison with SM&CR: Many responses highlighted the similarities with the Senior Managers & Certification Regime (SM&CR), with some agreeing that the new proposals were consistent with SM&CR requirements, while others felt it was excessive.
• Overseas Checks: Concerns were raised about the cost and complexity of obtaining background checks in certain non-UK jurisdictions.
• Competitiveness: One respondent expressed concern about the potential impact on the UK’s competitiveness and urged the FCA to reconsider its proposal as a result of this.

FCA Response

The FCA addressed these concerns by emphasising the alignment of the new checks with existing SM&CR requirements and the necessity of these measures to prevent financial crime. The FCA also noted that the cost and complexity of overseas checks were considered proportionate given the benefits of preventing criminals from exploiting the system.

Pros and Cons of Introducing Additional Requirements Regarding Criminal Background Checks 

Pros

• Mandatory background checks serve as a useful way of increasing the scrutiny placed on impending controllers of regulated firms. This is particularly pertinent in areas where the use of criminal background checks or overseas equivalents were not previously commonplace.
• There is a focus on preventing potential bad actors from entering the regulatory perimeter and serves as a tool to maintain the integrity and trustworthiness of financial markets. Subsequently, individuals with a history of financial crime are less likely to gain control of financial institutions, thereby reducing the risk of fraud, money laundering and other financial crimes.
• Consumers are more likely to trust financial institutions that are regulated by a body that enforces strict background checks, leading to increased confidence in the financial system.
• The FCA will be aligned with international regulatory standards and recommendations, such as those from FATF, enhancing the UK’s reputation in global financial markets

Cons

• Implementing mandatory background checks can add significant administrative tasks for both the FCA and financial institutions, potentially slowing down the authorisation and registration process.
• The cost of conducting thorough background checks, especially for international applicants, can be substantial. This could be particularly burdensome for smaller financial institutions.
• There may be concerns about the invasion of privacy for individuals undergoing these checks.

Conclusion

These measures can contribute to a more robust and reliable regulatory framework, ultimately benefiting both the financial industry and its consumers.

The introduction of mandatory criminal background checks for owners and controllers at the Authorisation’s gateway is a significant step towards enhancing market integrity and consumer protection. By aligning with international standards set by the FATF, the FCA aims to safeguard the UK’s financial systems from exploitation by bad actors, thereby maintaining trust and confidence in the financial market.

How can we help at Thistle?

At Thistle Initiatives we can support your firm getting ready for the changes. Some ways we can assist are:

• Continue to keep you updated on regulatory changes as part of the authorisation process. This will ensure you are well informed and prepared in advance of submission of your application.
• Provide additional guidance on the equivalent background checks for Controllers based outside of the UK.

For enquiries, please contact us at 0207 436 0630 or via email at info@thistleinitiatives.co.uk.