FCA Steps Up Scrutiny of Unregulated Lenders
The UK Financial Conduct Authority is increasing scrutiny of unregulated lenders, leasing companies and money brokers amid concerns that complex financing structures could facilitate financial crime and create risks for consumers and markets.
Public reporting indicates that the regulator is focusing on activities that may sit outside the normal authorisation perimeter but still connect with regulated firms and the wider financial system.
Risk does not stop at the regulatory perimeter
Unregulated lenders may use layered corporate structures, brokers, special-purpose vehicles or cross-border funding arrangements. These features can make it harder to identify the true source of funds, the ultimate beneficiary of a transaction or whether credit is being used to move illicit value.
Regulated banks and payment providers dealing with such businesses should avoid treating the absence of an FCA authorisation requirement as evidence of low risk. Due diligence should examine ownership, funding sources, business purpose, customer profile and links to higher-risk jurisdictions.
Transaction monitoring should also account for rapid movement of borrowed funds, circular payments and repayments from unrelated third parties. The FCA’s focus signals that supervisors may look closely at how regulated firms manage exposure to counterparties outside the perimeter, particularly where complex arrangements could obscure financial crime.
Annex 1 firms and counterparty checks
The FCA refers to unregulated lenders, safe-custody providers, money brokers and financial leasing companies as Annex 1 firms. Although they may not need full financial-services authorisation, their activities can still fall within the UK Money Laundering Regulations and create exposure for regulated counterparties.
Regulated firms should confirm whether an Annex 1 counterparty is properly registered where required, understand its customer base and establish who controls funds or assets moving through the relationship. Reviews should cover sanctions exposure, source of capital, geographic footprint and the quality of the counterparty’s own AML controls.
Review points for regulated counterparties
- Confirm the lender’s legal status and any registration required under the Money Laundering Regulations.
- Identify beneficial owners, funding providers and material introducers.
- Test whether transactions match the stated lending or leasing activity.
- Escalate complex structures that do not have a clear economic purpose.
