The Financial Conduct Authority (FCA) has announced increased scrutiny of Annex 1 firms, signalling a tougher regulatory approach towards sectors it believes may present heightened financial crime risks. The move is designed to strengthen anti-money laundering (AML) controls and ensure firms operating in these sectors have appropriate safeguards in place. 

For organisations impacted by these changes, the message is clear: regulators expect robust, risk-based AML frameworks that are tailored to your business, not generic policies borrowed from elsewhere.

What Has Changed?

The FCA has raised concerns about risks within Annex 1 firms, particularly around the potential for financial crime and weaknesses in AML controls. The regulator specifically highlighted concerns where firms rely too heavily on procedures developed by parent companies or group entities, rather than implementing controls designed around their own risks, governance structures and business operations.

As part of its enhanced oversight, the FCA has confirmed that:

• Registration applications from Annex 1 firms will receive greater scrutiny.
• Firms should expect registration processes to take longer.
• Organisations must clearly demonstrate compliance with Money Laundering Regulations.
• The FCA has contacted hundreds of Annex 1 firms to gain a deeper understanding of their activities, business models and associated risks.

The regulator has also highlighted concerns surrounding unregulated lending conducted through complex corporate structures, including special purpose vehicles (SPVs), and is actively seeking to identify and disrupt financial crime risks within the sector.

Which Businesses Are Affected?

Annex 1 firms include businesses such as:

• Unregulated lenders
• Money brokers
• Financial leasing companies
• Safe custody providers

These organisations are required to register with the FCA for anti-money laundering supervision purposes.

While these firms may not be subject to the same regulation as authorised financial services businesses, they are still expected to maintain effective AML controls and demonstrate that they understand and manage their financial crime risks appropriately.

What Should Annex 1 Firms Do Now?

With regulatory expectations increasing, firms should proactively review their compliance frameworks and identify any potential gaps before regulatory scrutiny arrives.

1. Review Your AML Policies and Procedures

Many firms have grown rapidly or become part of wider groups. The FCA has made it clear that firms cannot simply rely on off-the-shelf or group-wide AML procedures if they do not reflect their specific business activities and risks.

Organisations should ensure policies are:

• Tailored to their business model
• Aligned to current risks
• Regularly reviewed and updated
• Well documented and auditable

2. Reassess Your Risk-Based Approach

A risk assessment should not be a one-time exercise. Businesses need to understand:

• Who their customers are
• Where risks exist within their client base
• Whether enhanced due diligence is required
• How risks change over time

A strong risk-based approach helps firms demonstrate to regulators that they understand and actively manage their exposure to financial crime.

3. Strengthen Customer Due Diligence

Customer Due Diligence (CDD) remains a cornerstone of effective AML compliance.

Firms should ensure they can confidently:

• Verify customer identities
• Screen individuals and businesses against sanctions and PEP databases
• Identify beneficial ownership structures
• Conduct enhanced due diligence where required
• Maintain accurate records

4. Prepare for Greater Regulatory Examination

The FCA has indicated it will be engaging more closely with Annex 1 firms and gathering additional information to understand business activities and risks.

Firms should be ready to demonstrate:

• Effective governance
• Clear AML controls
• Ongoing monitoring processes
• Employee training programmes
• Accurate compliance records

How SmartSearch Can Help

As regulatory scrutiny increases, firms need compliance processes that are both effective and efficient.

SmartSearch helps businesses meet AML obligations through a fully digital compliance platform that streamlines customer onboarding, due diligence and ongoing monitoring.

Automate Customer Verification

SmartSearch enables firms to verify individuals and businesses quickly while maintaining a robust audit trail. This reduces manual administration and helps organisations demonstrate their compliance efforts.

Strengthen AML Controls

Through integrated identity verification, sanctions screening, PEP checks and adverse media monitoring, businesses can build a more comprehensive picture of potential risk at the point of onboarding.

Support a Risk-Based Compliance Approach

By providing access to reliable customer intelligence and monitoring capabilities, SmartSearch helps firms apply appropriate controls based on risk rather than taking a one-size-fits-all approach.

Demonstrate Compliance More Effectively

As scrutiny increases, firms need confidence that they can evidence their compliance processes. SmartSearch helps create clear, auditable records that support regulatory expectations and internal governance requirements.

The Bottom Line

The FCA's announcement is another indication that financial crime prevention remains a key regulatory priority. For Annex 1 firms, the focus is no longer simply on having AML procedures in place; it's about demonstrating that those controls are effective, appropriate and tailored to the specific risks facing the business.

Organisations that take action now by reviewing their AML frameworks, strengthening customer due diligence processes and adopting technology-led compliance solutions will be better positioned to meet regulatory expectations and minimise risk.

For firms facing increased scrutiny, preparation today could make all the difference tomorrow.