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HM Treasury’s Plans for Improving the UK’s MLRs – What Firms Need to Know

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Sixteen months after publishing its original consultation on improving the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), HM Treasury (HMT) has now released its official response.

The changes outlined are not a wholesale overhaul of the UK’s AML framework, but rather targeted refinements aimed at improving clarity, reducing unnecessary burdens, and focusing resources on higher-risk areas. Draft legislation has yet to be published, but HMT intends to lay the formal amendments before Parliament by the end of this year.


Key Proposed Changes


1. Clarifying “Establishing a Business Relationship”

The MLRs require firms to conduct due diligence when they “establish a business relationship” — but this definition can be interpreted differently across sectors. HMT will work with supervisors and industry bodies to issue guidance clarifying the term, ensuring greater consistency in its application.


2. Source of Funds under Standard CDD

Current rules say a source of funds check should be carried out “where necessary.” HMT wants guidance to make it clear that this applies when a transaction is inconsistent with what the firm knows about the customer and their risk profile. This should reduce unnecessary checks in low-risk, expected transactions.


3. Enhanced Due Diligence (EDD) Risk Factors

Supervisors and industry bodies will also be asked to clarify:

  • When EDD is compulsory.

  • How specific risk factors in the MLRs should be applied in practice.


4. High-Risk Third Countries – Narrowed Scope

EDD will only be automatically required for countries on the FATF High Risk Jurisdictions Call for Action list — currently North Korea, Iran, and Myanmar — rather than all FATF “increased monitoring” jurisdictions. This narrows the scope of mandatory EDD obligations.


Other Notable Measures


  • EDD for “Unusually Complex or Unusually Large” Transactions – The word “unusually” will be added before both “complex” and “large” to prevent EDD from being applied unnecessarily in low-risk scenarios.

  • Simplified Due Diligence for Pooled Client Accounts – A clearer route to proportionality for certain account structures.

  • Crypto asset Firms – FCA-authorised crypto asset firms will no longer need to register separately under the MLRs, aligning regimes more closely with FSMA authorisation requirements.


Impact and Industry Reaction


These changes are intended to reduce the weight of compliance in areas where risks are low, while sharpening focus where AML risks are higher. Some firms may welcome the shift towards proportionality, while others may see the reforms as incremental rather than transformational.


Ultimately, the effectiveness of these changes will depend on the detail of the forthcoming legislation and accompanying guidance — particularly on definitions and risk factor interpretation.


K2 Regulatory Consultants’ Perspective


At K2, we see these proposals as a chance for firms to:

  • Recalibrate risk assessments in light of narrowed EDD triggers.

  • Review policies and procedures to ensure alignment with the upcoming clarifications.

  • Train staff on the refined definitions of “establishing a business relationship” and “when necessary” source of funds checks.

  • Streamline processes where the regulatory burden can be legitimately reduced without compromising AML controls.


We can help your firm prepare for the changes by:


  • Conducting a gap analysis of current AML procedures against the proposed reforms.

  • Updating your risk-based approach to reflect the revised EDD scope and criteria.

  • Advising on how to implement proportionality without creating regulatory blind spots.

  • Drafting implementation plans and training modules for frontline, compliance, and audit teams.


Bottom line: While these amendments may not be revolutionary, they signal a clear direction — a UK AML regime that is more proportionate, risk-focused, and practical in its application. Firms that adapt early will be well-placed to benefit from reduced operational friction while still meeting the FCA’s expectations for robust AML compliance.


 
 
 

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