FCA Warns Regulated Entities on Due Diligence Risks with Annex 1 Unregulated Lenders

The UK Financial Conduct Authority (FCA) has issued a reminder to regulated financial institutions regarding the compliance and counterparty risks associated with dealing with "Annex 1" firms, such as unregulated lenders, safe custody providers, money brokers, and financial leasing companies. Currently, around 1,200 Annex 1 entities are registered with the FCA exclusively for anti-money laundering (AML) supervision. The regulator clarified that its supervisory remit over these firms is strictly limited to monitoring adherence to AML obligations, distinguishing this registration regime from full authorization under the Financial Services and Markets Act. Consequently, the FCA's broader conduct rules do not apply to Annex 1 businesses, and their customers cannot access the Financial Ombudsman Service (FOS). Regulated entities transacting with Annex 1 firms are required to perform thorough due diligence in accordance with statutory requirements. The FCA specified that firms must obtain direct confirmation of an entity's registration status, independently verify provided information, and evaluate and mitigate relevant risks, including those set out in the 2025 National Risk Assessment. The regulatory alert follows ongoing supervisory initiatives regarding compliance standards across the sector. The FCA previously highlighted deficiencies in AML controls directly to Annex 1 leadership through a CEO letter in 2024, followed by targeted supervisory reviews of 300 firms in late 2025. The regulator also raised consumer protection concerns, citing practices where retail borrowers have been advised to set up limited companies to obtain unregulated credit, including bridging finance from Annex 1 lenders. The FCA emphasized that consumers must be aware that such arrangements forfeit statutory protections, including access to the Financial Ombudsman Service in the event of a dispute.