Regulated firms reminded of due diligence for unregulated lenders
The Financial Conduct Authority (FCA) has reminded regulated firms to conduct thorough due diligence when engaging with unregulated lenders, known as 'Annex 1' firms. The FCA's oversight of these 1,200 firms is limited to anti-money laundering obligations, leaving consumers without access to the Financial Ombudsman Service.
Limited oversight, significant risks
The Financial Conduct Authority's regulatory powers over approximately 1,200 'Annex 1' firms are currently confined to anti-money laundering (AML) obligations.
These entities, which include unregulated lenders, safe custody providers, money brokers, and financial leasing companies, are registered solely for AML purposes and do not fall under the FCA's broader rulebook.
This distinction means that the FCA's wider conduct rules, which protect consumers in the regulated sector, do not apply.
Consequently, customers engaging with these firms are unable to access the Financial Ombudsman Service (FOS) for dispute resolution or compensation if issues arise.
The FCA emphasizes that this registration-based regime differs fundamentally from the comprehensive authorization regime under the Financial Services and Markets Act, highlighting a significant gap in consumer protection.
Due diligence and consumer vulnerabilities
Regulated firms are required to conduct thorough due diligence when engaging with Annex 1 firms.
This includes seeking direct confirmation of their registration status, performing independent checks on information provided, and understanding and managing any risks, such as those detailed in the 2025 National Risk Assessment.
The FCA has proactively addressed anti-money laundering standards with Annex 1 businesses, sending a letter to CEOs in 2024 and following up with 300 firms in late 2025.
A specific concern involves consumers encouraged to establish limited companies to access unregulated bridging finance from Annex 1 firms, which means they lose access to the Financial Ombudsman Service if problems arise.