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The FCA just dropped guidance. Regulated companies need to run thorough checks when they work with unregulated lenders, custody providers, and financial leasing firms that operate outside the watchdog’s full regulatory reach.
Around 1,200 firms sit in a weird regulatory limbo – they’re registered with the FCA but only for anti-money laundering purposes. These so-called “Annex 1” firms don’t face the same conduct rules that other financial companies deal with under the Financial Services and Markets Act. And here’s the kicker: customers who get burned by these firms can’t take their complaints to the Financial Ombudsman Service.
Pretty big gap there.
Due Diligence Gets Critical
Regulated firms can’t just trust what these Annex 1 outfits tell them. They’ve got to verify registration status themselves, check the information independently, and assess risks – including the nasty stuff flagged in the 2025 National Risk Assessment. The FCA already sent warning letters to CEOs of Annex 1 businesses back in 2024 about dodgy anti-money laundering standards.
Sarah Pritchard, who runs Markets at the FCA, said regulated firms bear the responsibility for managing risks when they deal with these limited-oversight companies. She basically told them: “You’re on your own for due diligence here.”
The regulator followed up with 300 firms in late 2025 to check their compliance. Not exactly a gentle nudge.
But consumers are getting caught in this mess too. The FCA spotted cases where people get advised to set up limited companies just to access loans from unregulated bridging finance lenders. Those borrowers don’t realize they’re giving up Financial Ombudsman Service protection if things go sideways.
March 2026 Warning Shot
On March 21, 2026, the FCA cranked up the pressure again. The regulator told firms they need to align with legislative requirements and keep robust anti-money laundering controls in place. Basically, don’t get sloppy just because these Annex 1 firms operate in a regulatory gray zone.
The authority’s been having ongoing chats with industry players to hammer home compliance standards. Those 300 firm follow-ups in late 2025 weren’t just paperwork exercises – the FCA wanted to see actual adherence to anti-money laundering obligations.
Pritchard stressed that transparency and accountability matter in financial dealings, even when one party operates under limited regulatory oversight. The regulated firms engaging with Annex 1 entities can’t pass the buck on risk management. Market participants tracking FCA Probes Market Financial Solutions Over will find additional context here.
The FCA keeps evaluating how these firms operate and what impact they’re having on the broader financial landscape. Consumer protection remains a big concern, especially when people don’t understand what they’re signing up for.
Officials are pretty vocal about the need for transparency in transactions involving Annex 1 firms. The regulator’s proactive stance shows in its decision to keep checking on these 300 companies, trying to plug any oversight gaps.
Consumer Protection Concerns
The focus extends to scenarios where individuals form limited companies to access unregulated lending options. The FCA keeps hammering home that consumers need to understand the risks – particularly losing access to the Financial Ombudsman Service when disputes pop up.
As oversight continues, the FCA stays engaged in discussions with regulated firms to strengthen compliance frameworks. It’s part of a broader push to maintain financial system integrity and protect consumers from potential harm.
The regulator’s latest communication underscored the specific risks tied to unregulated lending entities. The detailed examination of anti-money laundering practices with those 300 firms in late 2025 wasn’t a one-off – the FCA wants these companies to stick to compliance standards and prevent illicit financial activities.
Pritchard emphasized that firms need to verify Annex 1 entity registration and actively manage any risks they identify during due diligence processes. Can’t just tick boxes and move on.
The authority continues warning consumers about potential pitfalls when engaging with unregulated lenders, especially complex arrangements like unregulated bridging finance. The lack of Financial Ombudsman Service protection remains a critical concern as the FCA tries to shield consumers from unforeseen financial disputes. This development aligns with Crypto Analyst Warns Traders About TACO, highlighting broader market trends.
The regulator’s actively engaging with industry stakeholders to improve awareness and compliance. It’s part of a broader strategy to ensure all financial sector entities can handle challenges posed by unregulated firms.
Open communication lines with both regulated firms and consumers reinforce the importance of sticking to established financial regulations. The FCA isn’t backing down from its oversight role, even when dealing with firms that technically sit outside its full regulatory powers.
The authority’s commitment to safeguarding the financial system from potential misuse shows in these ongoing dialogues and follow-up actions with hundreds of firms.
Frequently Asked Questions
What exactly are Annex 1 firms?
Annex 1 firms are unregulated lenders, custody providers, and financial leasing companies registered with the FCA only for anti-money laundering purposes, not full conduct regulation.
Can consumers complain to the Financial Ombudsman Service about Annex 1 firms?
No, customers of Annex 1 firms cannot access the Financial Ombudsman Service for dispute resolution since these firms operate outside full FCA regulation.
