Annex 1 financial institutions are unregulated entities carrying on certain financial activities, including unregulated lending, financial leasing, and various securities and corporate finance services. Although they are not FCA-authorized, they must register with the FCA for anti-money laundering purposes.

The FCA's central concern is the potential for Annex 1 firms to facilitate financial crime. The regulator has observed firms relying too heavily on the financial crime controls of parent companies or adopting generic, off-the-shelf compliance procedures designed for different businesses. The FCA has emphasized that each legal entity must independently assess its own money laundering risks and ensure that its controls are appropriately tailored to its activities, governance arrangements and operating model.

Of particular relevance to capital markets participants is the FCA's warning about unregulated lending conducted through complex structures, including special purpose vehicles (SPVs). While SPVs that merely acquire receivables or participations will not necessarily fall within the Annex 1 registration regime, SPVs that originate loans may be required to register as Annex 1 financial institutions. The FCA considers such structures capable of creating risks for both consumers and markets, reflecting a broader concern about transparency, governance and AML controls in non-bank financing arrangements.

The FCA has also reminded regulated firms to undertake robust due diligence when dealing with Annex 1 counterparties and, where appropriate, obtain direct confirmation of a firm's registration status. This message is particularly relevant for firms involved in lending, securitisations, structured finance transactions and other capital markets activities that may involve SPVs, money brokers or non-bank financing entities.  

To address its concerns, the FCA has increased the scrutiny applied to Annex 1 registration applications and warned applicants to expect longer processing times. In parallel, it has issued information requests to approximately 900 Annex 1 firms as part of a sector-wide review of business models, activities and risks. The initiative underscores the FCA's intention to deepen its oversight of a sector that increasingly sits at the intersection of financial crime compliance and capital markets activity.

Authored by Alix Prentice and Jen Staniforth.