FCA Finalised Guidance FG25/3: Updated Approach to Politically Exposed Persons (PEPs)

The Financial Conduct Authority (FCA) has published Finalised Guidance FG25/3, clarifying how UK firms should assess and manage Politically Exposed Persons (PEPs). This guidance builds on the UK’s existing Money Laundering Regulations (MLRs) and incorporates a more proportionate, risk-based approach — with important updates for compliance teams, particularly in the treatment of domestic PEPs.

Key Clarifications

1. Non-Executive Board Members of Central Government Boards

The FCA has made it explicitly clear that non-executive board members of UK central government boards should not be treated as PEPs unless they meet the PEP definition in another capacity — for example, as a member of the House of Lords. This should help reduce unnecessary friction in onboarding and due diligence processes where the individual’s role does not inherently present elevated money laundering or terrorist financing risk.

2. Greater Flexibility in PEP Approval Processes

Previously, many firms limited PEP relationship approval or sign-off to a small number of senior individuals. FG25/3 introduces more flexibility, allowing sign-off to be delegated to any staff member who:

• Has sufficient knowledge of the firm’s exposure to money laundering, terrorist financing, and proliferation financing risks; and

• Has sufficient authority to take decisions affecting that risk exposure.

The FCA expects firms to:

• Clearly document who these authorised staff are.

• Provide targeted training so they understand the requirements for approving PEP relationships.

  
  

3. Domestic vs Foreign PEPs

As a starting point, firms should treat domestic PEPs, their family members, and their close associates as lower risk than foreign PEPs — unless enhanced risk factors are present. This reflects the UK’s intention to take a proportionate approach, ensuring enhanced due diligence (EDD) is applied only where justified by the actual risk profile.

What This Means for Compliance Teams

These updates provide both clarity and operational flexibility:

• Reduced over-application of EDD – By excluding non-executive central government board members from PEP status unless they qualify via another role, firms can focus resources on genuinely higher-risk relationships.

• Empowered decision-making – By training and authorising more staff to approve PEP relationships, firms can streamline workflows without weakening risk controls.

• Risk-based proportionality – Recognising domestic PEPs as generally lower risk reduces unnecessary burden while still meeting regulatory expectations.

  
  

K2 Regulatory Consultants’ Perspective

At K2, we see FG25/3 as a positive step towards balancing robust financial crime controls with practical onboarding and monitoring processes. However, firms must ensure that:

• PEP policies are immediately updated to reflect these clarifications.

• Training is refreshed for all staff involved in PEP identification, risk assessment, and relationship approval.

• Risk assessments for domestic PEPs still capture enhanced risk factors where relevant — such as high-profile public exposure, controversial sectors, or complex ownership structures.

  
  

Firms that adopt these changes quickly and clearly will be able to demonstrate to the FCA that they apply the PEP regime in line with the guidance — proportionate, risk-based, and focused on genuine financial crime threats.