Firms conducting certain activities which do not require full authorisation by the Financial Conduct (FCA) may still need to be registered with the FCA for the purposes of anti-money laundering (AML) supervision. These so-called Annex 1 firms – comprising unregulated lenders, safe custody providers, money brokers and financial leasing companies amongst others – are subject to their own registration and supervision regime and conducting relevant business without being registered (or having a live-registration in with the FCA) is a criminal offence as well as potentially exposing firms and their management to concurrent civil liability.
Following the collapse of MFS Investment Management in early 2026, this sector has become one of increasing focus for the FCA, with the regulator seemingly taking a hard line against those firms which fail to acquire the appropriate registration or otherwise which do not operate to the highest standards.
Background
The potential money-laundering risks associated with Annex 1 firms have been flagged by the FCA multiple times in past years. After 40% of Annex 1 applications for authorisation were rejected in 2022/23, the FCA wrote to the CEOs of all Annex 1 firms in March 2024 setting out its concerns.
It revealed a list of common issues, which included a failure to risk assess either their own or their customers’ activities adequately; financial crime controls which had not kept pace with business growth; discrepancies between registered and actual activities; and inadequate resourcing and oversight of financial crime requirements.
CEOs were asked to assess their AML controls against the common weaknesses found against them within 6 months of receiving the letter. However, additional issues were identified when the FCA sent information requests to 300 registered Annex 1 firms in late 2025. A further 900 firms were sent information requests in 2026, which means the FCA have contacted all registered Annex 1 firms between 2025-26.
Current Concerns
Many firms in the sector are found to rely too heavily on the AML controls of their parent company or wider group. Given that many Annex 1 firms (especially commercial lenders) may operate with parent – special purpose vehicle (SPV) structures, this is not surprising. However, the FCA’s expectation is clear that AML controls must instead be tailored to the specific firm and address risks unique to the way they operate. This certainly risks significantly increasing the compliance cost and burden for affected firms.
The FCA is also concerned about the risks to customers arising from these often-complicated corporate structures. In particular. customers of Annex 1 firms have been warned that they will not have access to the Financial Ombudsman Service, making it all the more important for firms to have robust AML systems and controls in place.
Similarly, regulated collaborators of Annex 1 firms may also be exposed to risk. Such firms have been instructed to perform due diligence on Annex 1 firms they work with, including seeking confirmation from the firm of their registration status, conducting independent checks of the information they provide, and understanding the firm’s business in accordance with legislative requirements.
As a result of its current concerns, the FCA has stated that Annex 1 registration applications will be particularly closely scrutinised, and that firms should expect longer service times than usual. While Annex 1 firms will not be subject to the FCA’s wider conduct rules following registration, the FCA has made clear that regulatory intervention – and enforcement action – may be considered where a firm’s existing controls are deemed inadequate. This can include the imposition of potentially draconian requirements at the FCA’s initiative as well as full criminal prosecution in some cases.
Next Steps
Given this renewed regulatory focus, Annex 1 applicants should ensure their applications are as strong as possible by following the recently updated guidance on money laundering registration. Once an application is submitted, the FCA has stated a decision will be made within 45 days, although in practice it is common for this to be extended. In that time, however, firms are urged to proactively continue improving their AML controls and update the FCA on any changes as promptly as possible.
In particular, an application must include a full description of specific activities carried out by the firm that falls under the classification of Annex 1 financial services; an explanation as to why its activities do not fall within the scope of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; and details of the firm’s Money Laundering Reporting (MLR) individuals.
Annex 1 firms which are already registered and have received an information request should prepare their responses to a high standard and ensure they reply within the deadline set. Special focus should be given to presenting tailored risk assessment and oversight policies, along with ensuring that all business and governance arrangements mentioned represent what actually happens in practice.
Kingsley Napley LLP has significant experience in advising Annex 1 firms on registration applications, supervisory issues and investigations. If you would like to discuss your upcoming FCA registration application or query, please get in touch for a confidential consultation. Please contact James Alleyne or Jill Lorimer from our team to discuss how best to structure a registration application for your business.
