July saw a number of updates regarding the prevention of money laundering in the UK, reflecting the Government’s stated commitment to ensuring that compliance requirements are effective yet not unnecessarily onerous for the industry. Recent updates focus on making customer due diligence and enhanced due diligence requirements more practical and proportionate to the risks these processes seek to identify and respond to. The following provides an overview of two such updates and their implications for asset managers.
Outcome of HM Treasury consultation on the Money Laundering Regulations
On 17 July 2025, HM Treasury published the outcome of a consultation held last year on potential improvements to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “Money Laundering Regulations”).
This consultation was launched in an effort to improve the effectiveness of the Money Laundering Regulations. It covers a number of themes, the most important of which for the asset management industry is the effectiveness of customer due diligence (“CDD”) – and potential reforms to improve its clarity and proportionality.
Enhanced due diligence
HM Treasury noted that certain amendments to the Money Laundering Regulations could ensure that enhanced due diligence (“EDD”) would be mandated in a more proportionate set of circumstances. 41% of respondents stated that mandating EDD where a transaction was “complex or unusually large” was excessive, particularly within sectors where most transactions were “complex” such as mergers and acquisitions. HM Treasury stated it would amend this terminology to “unusually complex” (though it noted that “complex” was already interpreted in this way by most firms), but reiterated that firms must still consider wider geographic, product and customer risk factors in deciding whether to conduct EDD.
In addition, under current rules, EDD is mandatory where the customer or transaction is linked to a ‘high risk third country’, defined by reference to the Financial Action Task Force lists on countries subject to a ‘Call for Action’ (those with the most serious strategic deficiencies) and those merely subject to ‘Increased Monitoring’. Many respondents felt that requiring mandatory EDD for all countries on these lists did not always reflect the actual risk to the UK, and that a customer/transaction being linked to such a country did not – in reality – make a customer high risk. HM Treasury responded that it would introduce new rules mandating EDD only for customers or transactions linked to countries on the ‘Call for Action’ list, and that otherwise a more targeted, risk-based approach should be employed by firms.
Clarificatory amendments and updates
HM Treasury noted that certain ambiguities could result in an overly risk-averse approach to CDD, and therefore stated that these would be clarified. These included the question of whether employees, when acting for the companies that employ them, counted as ‘acting on behalf of’ those companies and should therefore be subject to CDD. HM Treasury responded that it would review its guidance to ensure that it was clear that ‘acting on behalf of’ referred to entities acting on behalf of individuals or third parties acting on behalf of an organisation. Employees of an organisation acting on its own behalf would not come under this provision.
HM Treasury also noted that digital technologies could be used to enhance the efficiency of CDD, and had asked respondents what type of guidance would encourage the uptake of such technologies by firms. Respondents stated that currently limited uptake related to cultural inertia and concerns about the legitimacy of available technologies – and that government accreditation of digital identity providers and/or minimum standards would assist with this. HM Treasury will now work with the Department for Science, Innovation and Technology to produce guidance on how to use digital identities for CDD checks.
FCA Guidance on treatment of politically exposed persons for anti-money laundering purposes
On 7 July 2025, the Financial Conduct Authority (“FCA”) released revised guidelines for firms subject to the Money Laundering Regulations, regarding the treatment of politically exposed persons (“PEPs”). The headline points from these revisions are:
- firms should take a case-by-case approach to PEPs and the transaction, assessing all relevant factors when considering what risks are posed by the PEP in question;
- only high level officials in low-risk countries should be considered PEPs, particularly UK PEPs;
- senior manager approval can be given at lower levels of seniority depending on the risk posed by the business relationship or transaction; and
- PEP status for family members and close associates ceases as soon as the relevant official leaves office.
Local versus domestic PEPs
The FCA guidance distinguishes domestic and foreign PEPs, stating that firms should only treat those in the UK who hold truly prominent positions as PEPs, and that local government officials, and non-executive board members (NEBMs) of UK civil servant departments are not be considered PEPs at all. However, in foreign jurisdictions, local and lower-level officials may well be PEPs – depending on the risk profile of the country and the nature of their public functions.
In lower risk countries, only those with “true executive power” should be considered PEPs. In the UK, this would not “normally” include public servants below Permanent or Deputy Permanent Secretary. Firms should clearly document decisions to go beyond the Regulations and guidance in treating a customer as a PEP.
Risk-based approach to PEPs
The updated guidance emphasizes that a business relationship with a PEP, or their family members or close associates, should not be treated generically, but rather a firm should consider the risks posed by that particular PEP and manage those appropriately. Factors to consider include the high- or low-risk nature of their jurisdiction, the business relationship and its capacity to be used to facilitate corruption, and whether the PEP in question has wealth or a lifestyle legitimately explicable considering their official position. These factors (among others) are listed in the guidance to inform these assessments.
Firms are instructed to take adequate measures to establish customers’ source of wealth and funds, relevant to the proposed business relationship or transaction, by minimising information collection in lower-risk cases and taking further steps to clarify and verify information in higher-risk cases. Additionally, the FCA clarified that, while PEP status should be maintained for at least 12 months after an individual leaves office, family members and close associates revert to ordinary customer status immediately.
Senior management approval of PEP Relationships
The FCA’s revised guidance allows for the oversight and approval of business relationships with PEPs to occur at lower levels of seniority within firms, provided that the individuals responsible have sufficient authority to do so, and a comprehensive understanding of both the firm’s overall risk profile, and how the business relationship could affect that risk profile. The seniority of the individual who approves the relationship must itself be proportionate to the risk posed by the specific PEP relationship, with lower-level approval being permitted for lower-level business relationships. Nonetheless, firms must maintain robust internal controls and documentation, and the firm’s Money Laundering Reporting Officer must retain overall oversight of the diligence process and knowledge of PEPs onboarded.
Beneficial Ownership and PEP Status
Regarding beneficial ownership, the FCA clarified that a legal entity should not automatically be treated as a PEP simply because a PEP is a beneficial owner of that entity. Instead, firms must establish whether the PEP exercises significant control over the entity or the ability to use their own funds in relation to the entity. . Otherwise, CDD measures should be proportionate to the PEP’s actual influence and the specific circumstances of the business relationship – for example, standard CDD if the PEP is merely a figurehead, but EDD if the PEP has significant control or the ability to use their own funds in relation to the entity.
Implications for asset managers
The clarifications and risk-based refinements are intended to streamline compliance, reduce unnecessary burdens, and encourage the adoption of digital solutions. These changes will allow firms to have greater discretion to focus resources on what those firms assess to be genuinely higher-risk relationships and transactions, provided such assessments are reasonably and defensibly reached.
Whilst the changes to the PEP guidance and the possible changes to the relevant rules are helpful, many managers will also be subject to AML laws in other countries (including Luxembourg) where there is less flexibility. As such, for managers navigating different regimes these changes may have less of an impact in practice. That said, managers should review their existing procedures against the PEP guidance and watch this space for future changes to the UK ML Regulations.
