FCA Finalised Guidance on PEPs: FG 25/3 – A recalibrated approach for domestic politically exposed persons

Introduction

On 7 July 2025, the Financial Conduct Authority (FCA) published its long-awaited Finalised Guidance FG 25/3 on the treatment of politically exposed persons (PEPs) for anti-money laundering (AML) purposes under the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).

This guidance follows the targeted consultation in GC 24/4 and implements changes to align with the amended Regulation 35 of the MLRs, which came into force on 10 January 2024, fundamentally shifting the treatment of domestic PEPs. The new regime has significant practical implications for regulated firms, requiring updates to AML frameworks, governance, training, and customer communications—particularly given the FCA’s concurrent focus on Consumer Duty obligations.

Legal and regulatory background

Statutory context

Under the MLRs, firms must identify PEPs—defined broadly to capture individuals entrusted with prominent public functions, their family members, and close associates. Regulation 35 then requires:

• identification of PEP relationships (Reg 35(1));
• application of enhanced due diligence (EDD), including senior management approval (Reg 35(5)(b)), establishing source of wealth and funds (Reg 35(5)(c)), and enhanced ongoing monitoring (Reg 35(5)(d)).

The FCA guidance under FG 25/3 sits alongside the Joint Money Laundering Steering Group (JMLSG) Guidance, which remains critical for firms seeking to rely on “having regard to” protections under s.330 pf the Proceeds of Crime Act 2002 (POCA).

The 2024 amendments and domestic PEP carve-out

The amendments to Reg 35 introduced in January 2024 (via the Money Laundering and Terrorist Financing (Amendment) Regulations 2023) implemented a presumption of lower risk for domestic PEPs, their family members, and known close associates, unless other risk factors exist.

This places UK law at some distance from the EU’s 4th and 5th AML Directives, which still mandate a uniform EDD regime for all PEPs without distinguishing between domestic and foreign exposure.

Key changes and clarifications in FG 25/3

FG 25/3 provides finalised FCA guidance on these new statutory requirements, replacing outdated pre-Brexit references and refining the UK’s risk-based approach. Key features include:

Domestic PEPs: presumption of lower risk

• The FCA confirms that domestic PEPs (and their family/close associates) must generally be treated as presenting a lower risk, absent additional factors.
• This means no automatic requirement for EDD measures such as verifying source of wealth or source of funds, purely due to domestic PEP status.

Examples where firms must override the presumption

FG 25/3 illustrates circumstances that might necessitate full EDD, even for domestic PEPs:

• Connections to high-risk jurisdictions.
• Known adverse media suggesting financial crime.
• Roles with extensive international financial activity or unusual wealth patterns.

Firms must document these assessments, showing how the risk-based conclusion was reached.

Specific clarifications

• Civil service NEDs: FG 25/3 explicitly confirms that non-executive directors of UK civil service bodies are not to be treated as PEPs, resolving earlier uncertainty.
• Declassification triggers: Once a person ceases to meet the definition of a PEP (e.g. upon leaving office), firms must promptly remove the PEP status. This also applies immediately to family members and close associates—addressing previous inconsistencies in timing.
• Senior management approval: The obligation under Reg 35(5)(b) for senior executive sign-off remains. FG 25/3 emphasises this must sit alongside appropriate MLRO oversight.

Responses to industry feedback

In its feedback statement, the FCA addressed several industry concerns raised in GC 24/4:

• Declined to introduce rigid “declassification periods”, maintaining flexibility but encouraging documentation of prompt reviews post tenure.
• Confirmed no new illustrative lists of EDD triggers, to avoid overly prescriptive rules that might stifle risk-based decision-making.
• Highlighted the need to align PEP communications and fair treatment principles with the FCA’s Consumer Duty (PRIN 2A).

Consumer Duty and PEP treatment

FG 25/3 ties directly into the FCA’s wider agenda on customer outcomes under the Consumer Duty. It makes clear that:

• Customer communications around PEP identification and additional enquiries must be clear, fair and not misleading, avoiding language that implies wrongdoing simply by virtue of being a PEP.
• Firms should ensure communications and requests for information (such as about source of wealth) are proportionate to the assessed risk, thereby aligning with the “Consumer Understanding” and “Consumer Support” outcomes.

Practical implications for firms

Immediate policy and framework updates

• Revise AML risk assessments to incorporate the new domestic PEP presumption and to reflect circumstances that might override this.
• Update internal definitions, removing outdated EU references and excluding UK civil service NEDs from PEP frameworks.

Governance and MI

• Ensure that policies still mandate senior management approval for onboarding PEPs, with MI dashboards tracking domestic vs non-domestic PEP exposure.
• Strengthen MLRO oversight protocols to ensure timely declassification.

Customer-facing processes

• Update KYC and onboarding documentation to reflect the recalibrated approach to domestic PEPs.
• Review customer template letters and scripts to ensure clarity and fairness under the Consumer Duty.

Staff training

• Roll out updated training focused on:
  • the reduced risk approach to domestic PEPs;
  • identifying additional risk factors that may still necessitate EDD;
  • clear communication principles under the Consumer Duty.

Looking ahead: regulatory and cross-border considerations

FCA supervision and potential enforcement

The FCA has already signalled ongoing supervisory scrutiny in this area. Its 2024 multi-firm review identified inconsistent treatment of domestic PEPs, and failures could attract attention under both the MLRs and the FCA Principles (including PRIN 2A).

Divergence from EU approach

Firms with pan-European operations must carefully manage the divergence now emerging. Under the EU’s AML Directives, all PEPs remain subject to standard EDD irrespective of domesticity, creating a need for nuanced jurisdiction-specific policies.

Global trends

FATF discussions and post-Basel dialogues continue to evaluate proportional approaches to domestic political figures, meaning future regulatory alignment (or further divergence) is possible.

Key takeaways and action list

• Revisit your AML policy framework – ensure explicit alignment with the new Reg 35 regime and FG 25/3.
• Train staff to distinguish domestic PEPs and apply EDD only where genuinely elevated risks exist.
• Audit your customer letters and scripts for compliance with Consumer Duty expectations on clarity and fairness.
• Keep a documented rationale for every PEP decision – to be ready for FCA file reviews.

Conclusion

FG 25/3 underscores the FCA’s commitment to a proportional, risk-based approach to AML controls that treats domestic PEPs fairly while maintaining robust defences against illicit finance. Firms that recalibrate their frameworks promptly will not only secure compliance with the evolving regime but also demonstrate strong governance in line with the broader Consumer Duty.