FCA Highlights Risks when Dealing with Unregulated Lenders

Why It Matters

Failure to vet Annex 1 firms can expose regulated entities to AML breaches and reputational damage, while consumers lose recourse through the ombudsman.

Key Takeaways

• 1,200 Annex 1 firms registered only for AML compliance.
• FCA rules don’t apply; no ombudsman protection for their customers.
• Regulated firms must verify registration and conduct independent checks.
• 2025 National Risk Assessment guides risk management for Annex 1 dealings.
• FCA contacted 300 Annex 1 firms in late 2025.

Pulse Analysis

The FCA’s warning underscores a growing regulatory focus on the shadow ecosystem of unregulated lenders, often labelled Annex 1 firms. Unlike fully authorised entities, these 1,200 businesses operate under a registration‑only regime that limits the FCA’s oversight to anti‑money‑laundering obligations. This structural gap means they are exempt from the FCA’s conduct rules and their customers cannot turn to the Financial Ombudsman Service, creating a parallel market where traditional consumer safeguards are absent.

\n\nRisk managers must treat Annex 1 relationships as high‑risk exposures. The 2025 National Risk Assessment outlines heightened threats of money‑laundering and terrorist financing linked to unregulated bridging finance and corporate‑structure manipulation. Firms are expected to obtain direct confirmation of a partner’s registration, cross‑check data through independent sources, and embed robust monitoring into their AML frameworks.

\n\nIndustry response is likely to evolve as the FCA intensifies its outreach, as evidenced by the recent follow‑up with 300 firms. Best practice will involve formal due‑diligence checklists, continuous monitoring of the Annex 1 register, and clear escalation paths for any red flags. Looking ahead, the regulator may consider extending certain conduct obligations or creating a tailored oversight mechanism for high‑risk Annex 1 participants, prompting firms to proactively tighten their risk‑assessment processes now.