1.    Choosing an Appropriate Business Medium

The first item to consider before operating an “MSB” is setting up the business as a separate legal entity. Essentially what this means is that the business needs to be an incorporated legal entity, such as a Limited Company or a Limited Liability Partnership (LLP). This is step is of particular importance to the shareholders as it ensures managing the risks that are associated with the operation of an “MSB” and registration purposes.

To incorporate your business, an application must be made with the Companies House. The application to incorporate and register as either a Company or an LLP, is a relatively easy process and can be done either online or by post.

Fees: Online – £50.00 or if by Post – £71.00.

2.    Registering with the Financial Conduct Authority (FCA)

Money exchange businesses in the UK are regulated by the FCA and must comply with The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Depending on the scope of your activities, you must register as an Authorised Payment Institution (API) or a Small Payment Institution (SPI).

§  An API License is required for firms providing a wide range of payment services, such as handling over €3 million in transactions per month. The fee to be authorised as a PI is either a category 4 or a category 5 license fee ranging from £2720.00 – £5440.00.

§  An SPI License is needed for businesses dealing with small volumes, such as handling transactions less than €3 million per month. The fee to be authorised as a Small PI is £540.00.

The application process is lengthy. It can take 6 to 12 months depending on the complexity of the application and whether additional information is needed. In essence, applying to FCA is not light and professional legal advice is almost always recommended to avoid delays or complete rejection. The FCA will usually consider things such as compliance with their principles of business, adhering to the relevant rules in their handbook, and always meeting their minimum standards.

3.    Registering with HM Revenue and Customs (HMRC)

Businesses that are involved with currency exchange, transferring of money (money transmitters), small E-Money Issuers (EMI), payable cash cheques to costumers (Cheque Cashers), taking payment on telecommunications, digital, and IT devices and acts as an intermediary between a payer and supplier, or related financial services are required under the Money Laundering Regulation 2017 to register as an “MSB” for anti-money laundering supervision purposes.

Registration process:

§ Register as an MSB with the HMRC using the online service.

§ Registration will include a Fit and Proper Test; Relevant persons must pass the appropriate test before the business can register, and can remain registered, with HMRC. The Fit and Proper Test is a regulatory assessment used to evaluate the suitability of individuals in key roles within a business to ensure that they meet specific standards of integrity, competence, and reliability. This test is particularly important for Money Service Businesses (MSBs) and is applied to individuals such as Beneficial Owners, Officers, and Managers (BOOMs).

§ Ensure compliance with Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the Regulations) and the changes brought about by the 2019 amendments. To ensure compliance with Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) obligations, businesses must implement a robust framework of risk assessment, policies, controls, and procedures. Senior managers are responsible for overseeing compliance and must identify, assess, and manage risks to protect the business from being exploited. This includes appointing an AML officer, implementing a risk-based approach, and allocating sufficient resources for AML/CTF measures. Regular reviews and updates are essential to keep policies aligned with evolving risks. Businesses must also ensure appropriate training for staff and monitor compliance across all subsidiaries and branches, both in and outside the UK.

§ An AML nominated officer need not be on a full-time appointment basis; he/she could also carry their duties part-time provided that the nominated officer can meet the compliance requirements effectively. Additionally, an Anti-Money Laundering (AML) officer in the UK does not have to be British. There are no nationality restrictions as long as the individual meets the “fit and proper” criteria set by regulatory bodies and has the necessary skills, experience, and integrity. However, they must be accessible, have a good understanding of UK regulations, and potentially be based in the UK to fulfil their responsibilities effectively.

§ When registering for HMRC supervision the following fees apply:

Premises Registration Fee: £300.00 for each premises included in the application, payable annually. Adding new premises in the first 6 months incurs the full fee, while additions in the second half of the year are charged at £150.00.

Fit and Proper Test Fee: £150.00 per individual tested, applicable for MSBs.

Annual Supervision Fee: £300.00 for each premises, charged at the end of each registration year.

Small Business Reduction: Businesses with a turnover below £5,000.00 can receive a £120.00 refund after paying the full £300.00 registration or annual fee by applying through HMRC with proof of turnover.

4.    Compliance with Anti-Money Laundering (AML) Regulations

AML Policies, Controls and Procedures

Minimum Requirements

Your business’s policies, controls, and procedures must comprehensively address key compliance requirements to mitigate money laundering, terrorist financing, and proliferation financing risks. This involves conducting robust customer due diligence checks and ongoing monitoring to identify potential risks. Enhanced due diligence should be applied in cases involving Politically Exposed Persons (PEPs), their family members, or close associates. Additionally, a designated officer must be appointed to handle reports of suspicious activity and liaise with the National Crime Agency as needed. It is also crucial to ensure that staff and agents are thoroughly trained to recognize relevant risks and understand their responsibilities, including reporting any suspicious activities. Furthermore, your policies should be reviewed and updated regularly to remain effective and aligned with legal standards. Finally, accurate and up-to-date record-keeping must be maintained to ensure compliance and facilitate effective oversight.

5.    Further Legal and Operational Considerations

§ Data Protection Requirement

Any business that handles sensitive customer data, such as an MSB, will need to adhere by the UK General Data Protection Regulation (UK GDPR) and register with the Information Commissioner’s Office (ICO).

Depending on business size registration fees range from £40.00 to £60.00.

You must provide new customers with a statement that personal data will only be used for the purposes of preventing money laundering, terrorist financing or proliferation financing and provide them with the information as required under Article 13 of the GDPR.

When processing personal data, it is essential to provide clear and comprehensive information to data subjects, including the identity and contact details of the data controller and, if applicable, the controller’s representative. You should also include the contact details of your Data Protection Officer, if one has been appointed. Outline the purpose and legal basis for processing personal data and specify any recipients of the data. If the data is transferred outside the UK, indicate whether the receiving country has a UK data adequacy agreement or appropriate safeguards in place. Clearly state the retention period for the data, as well as the rights of the individual, such as access, deletion, and data portability. Additionally, inform the individual of their right to lodge a complaint with the Information Commissioner’s Office. If the provision of personal data is a statutory or contractual requirement, highlight the consequences of not providing this data. Finally, disclose the existence of any automated decision-making processes, including profiling, where applicable.

§ Ongoing Compliance Obligations

Senior Managers are expected to conduct regular AML audits and reviews, adhere to the FCA’s reporting requirements, and ensure compliance for HMRC inspection purposes.

§ Capital Requirements

Under FCA rules, Small Payment Institutions (SPIs) are not subject to specific capital requirements. However, they must still ensure that their operational expenses, including compliance costs, are adequately covered. For firms seeking full FCA authorization, which typically applies to larger entities with a higher volume of transactions, a minimum initial capital requirement of €20,000.00 may be mandated. The exact capital reserve requirements depend on the type and volume of services provided and aim to ensure the firm’s financial stability and capacity to manage risks effectively.

§ Banking Requirements

Money Service Businesses (MSBs) in the UK face strict banking requirements due to being categorized as high-risk. Banks typically require detailed information about the business model, AML policies, and proof of regulatory compliance with HMRC and FCA. Enhanced due diligence (EDD) is performed to assess the risk level, involving thorough background checks and continuous transaction monitoring.

Banking options for MSBs include traditional UK banks (where approval is challenging), specialist payment service providers, and fintech companies offering tailored solutions. These alternatives are more flexible but may still require a robust compliance framework to secure banking relationships.

§ Types of Insurance to Consider for a Currency Exchange Business

Professional Indemnity Insurance: Protects against legal expenses and compensation if a client claims damages due to errors, omissions, or professional negligence in the business’s services.

Crime Insurance: Provides coverage for financial losses resulting from theft, fraud, or other dishonest actions by employees or external parties.

Public Liability Insurance: Safeguards against legal claims for injury or property damage arising from the company’s operations.

Cyber Insurance: Given the vulnerability of financial services to cyber threats, this insurance covers potential losses from data breaches, cyber-attacks, or online fraud incidents.

This concludes the step-by-step guide to setting up a money exchange business in the UK. Establishing such a business is a complex undertaking that demands a thorough knowledge of regulatory requirements and compliance obligations. Seeking legal advice is the most prudent approach to ensure your business is structured correctly from the start.

At GOOD LAW INTL, we specialise in providing tailored legal support to help you navigate the complexities of UK regulations, from licensing to compliance with anti-money laundering rules. Our experienced team ensures that your business is fully compliant and positioned for success in this highly regulated sector.