Auxillias Bite-size: FCA increases scrutiny of annex 1 firms
Around 1,200 firms have now been contacted as the FCA steps up its AML supervision
What has happened
On 6 August 2026, the Financial Conduct Authority (FCA) published a statement confirming it is applying increased scrutiny to Annex 1 firms — unregulated lenders, safe custody providers, money brokers and financial leasing companies that must register with the FCA for anti-money laundering (AML) purposes under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The FCA has sent information requests to around 900 registered Annex 1 firms, following earlier engagement with 300 firms in late 2025. Once complete, this exercise will mean the FCA has contacted every registered Annex 1 firm in the UK, a population of roughly 1,200 businesses.
Why it matters
Annex 1 firms sit outside the FCA's full conduct regulation regime; they are registered solely for AML supervision, so the broader FCA rulebook does not apply to them. This creates a supervisory gap that the regulator is now moving to close, reportedly prompted in part by the collapse of Market Financial Solutions, which left a reported £1.3 billion creditor shortfall and around £250 million unaccounted for. The statement builds on a March 2026 FCA reminder to regulated firms about due diligence risks when dealing with unregulated counterparties.
What firms need to know
The FCA has flagged several specific concerns. It has seen Annex 1 firms relying too heavily on their parent company's financial crime controls, without independently assessing whether those controls suit their own risks, governance and operations. Off-the-shelf procedures designed for a different entity are not acceptable; each firm must tailor controls to how it actually operates. The regulator is also concerned about consumer and market risks from unregulated lending conducted through complex structures, including special purpose vehicles. Within group lending structures, only the SPV acting as the original lender needs Annex 1 registration; an SPV that merely acquires or funds loans originated by another group entity falls outside the requirement.
Applications for Annex 1 registration will now face closer scrutiny and should be expected to take longer, with firms needing to clearly demonstrate compliance capability with the Money Laundering Regulations before registration is granted. Regulated firms dealing with Annex 1 counterparties are reminded to maintain due diligence, including seeking direct confirmation of registration status rather than assuming it.
What firms should do now
Annex 1 firms should immediately review whether their financial crime controls are genuinely tailored to their own risk profile, rather than inherited wholesale from a parent or group entity. Firms should also prepare to respond substantively to any FCA information request covering activities, business models and risk exposure, as this is an active supervisory exercise rather than a routine survey.
Firms currently applying for Annex 1 registration should budget for longer processing timescales and ensure applications evidence robust, firm-specific AML controls. Regulated firms with Annex 1 counterparties should refresh due diligence procedures now, treating this as an immediate obligation rather than a developing one, given the regulator's explicit reference to earlier guidance on this point.
Key Takeaway
Scope of contact. The FCA has now written to substantially all c.1,200 registered Annex 1 firms, following 900 information requests in 2026 and 300 in late 2025.
Tailored controls required. Firms cannot rely on group or parent company AML controls; each entity must independently justify its own arrangements.
Longer registration timelines. New Annex 1 applications face closer scrutiny and should expect extended processing times.
Due diligence obligation. Regulated firms dealing with Annex 1 entities must verify registration status directly and maintain ongoing counterparty due diligence.
Structural risk focus. Complex lending structures, including SPVs, remain a specific FCA concern; only the SPV acting as original lender within a group requires registration.
How Auxillias can help
Auxillias works with a number of Tier 1 firms across consumer credit and motor finance, and has particular expertise advising on Annex 1 registration status, group lending structures and AML control design. The team is available to assist at any stage of this process, from an initial registration application through to reviewing existing structures, controls and counterparty due diligence arrangements.
If you would like support in this area please get in touch with the Auxillias team via the details on this page.
