Law firms: radical reform on the cards for the future supervision of AML

• Most England and Wales based law firms are regulated by the Solicitors Regulation Authority (SRA), including for anti-money laundering (AML) and counter terrorism (CT) purposes.
• Under reforms currently being considered, responsibility for the supervision of AML and CT could be taken away from the SRA (and other legal regulators UK-wide), and given to a new body, meaning firms could be subject to dual regulation in future.
• The consultation on this issue closes on 30 September 2023 and given the potential implications for law firms UK wide, is worth responding to.

HM Treasury is consulting on radical structural reform to AML and CT supervision in the regulated business sector as part of the Government’s wider effort to crackdown on dirty money entering into the UK. It recently announced it is gathering feedback on four new potential supervision models, with the stated objectives of, inter alia, selecting one that enhances the effectiveness of supervision and improves coordination across the system.

Whilst any changes introduced will impact an array of regulated businesses including accounting firms, barristers’ chambers and conveyancers, it is clear some of the proposals would be more far-reaching for law firms than others. Whichever model is ultimately adopted however, will likely mean a ramping up of AML scrutiny and enforcement in the future. This is because UK legal regulators in particular have been criticised for their “lax” approach to AML supervision to date and the fact enforcement in this area has fallen short of expectations.  

Although the consultation does not include consideration of changes to the AML and CTF requirements themselves, this too may well follow.

The current AML supervision landscape for law firms

There are presently three statutory AML and CT supervisors in the UK (HMRC, the Financial Conduct Authority (FCA) and the Gambling Commission (GC)) and 22 Professional Body Supervisors (PBSs), with the latter being overseen by OPBAS.

The SRA is the Professional Body Supervisor for AML and CT for the majority of England and Wales based law firms; firms and lawyers eligible for authorisation with the SRA are automatically supervised by it for AML and CT purposes as well. The SRA guides and where necessary, enforces those firms that it regulates.

Non-regulated law firms with no back-stop supervisor are often without any form of AML/ CT supervision, even when carrying out work within the scope of the Money Laundering and Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). This lacuna is one of the issues that the proposed structural reform may resolve and is one reason why reform is to be encouraged.

Another benefit would be enhancing the consistency of AML supervision. There are currently no fewer than eight other professional body supervisors in the legal sector, including the Chartered Institute of Legal Executives/CILEX Regulation, the Council for Licensed Conveyancers (CLC) and the Bar Standards Board (BSB). As such there is considerable scope for different approaches to both compliance and enforcement.  

The proposed alternative models

HM Treasury has proposed four alternative models for the future supervisory system:

1. Under the first model, ‘OPBAS+’, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) would be granted additional rule making powers (akin to those the FCA has) to allow it to, for example, set clear expectations of PBSs around risk-based and effective supervision (that could extend beyond the requirements of the MLRs themselves). Under this model, no changes would be required to the existing number or structure of supervisors. Given the long list of limitations that are cited alongside this model (including the inability to achieve the desired consistency), it is an unlikely solution to the current systemic shortcomings, despite immediate feasibility being a clear and obvious advantage. An associated drawback for firms would be cost since the OPBAS levy to PBSs would likely increase.
2. Under the second model, the number of PBSs would be reduced, with either two or six supervisors retaining responsibility for supervision. This could involve having one accountancy sector supervisor and one legal sector supervisor each with UK-wide remits or more likely in the legal sector at least, having one supervisor for each jurisdiction within the UK. The goal of this model would be to reduce inconsistency and complexity by retaining only the highest-performing supervisors. This model would likely see the SRA become the legal sector supervisor as it has the benefit of a larger regulated community and therefore greater resource. Less change would be felt by SRA regulated firms under this scheme and as such many may undoubtedly prefer this model. The SRA could also become the backstop supervisor to non-regulated firms.
3. The third model proposes a single professional services supervisor (SPSS) overseeing AML/CT Financing at all legal and accountancy sector firms, and potentially some or all of the wider sectors currently supervised by HM Revenue and Customs (HMRC) too. The SRA (and other legal service regulators) would still supervise their regulated community for all other purposes. Of course, a new body covering c.60,000 law firms and accountancy bodies as well as 17,000 estate and letting agency businesses would take some time to set up. Information sharing and consistency may be achieved, but there is a danger the SPSS would struggle to achieve a realistic understanding of the operational realities and associated risks of the legal sectors in each devolved administration.
4. The fourth and most radical model proposes a single public body undertaking all AML/CTF supervision in the UK. This new public body would likely operate independently, but remain accountable to HM Treasury. To work effectively, it would require an ambitious level of coordination between the new supervisor and existing regulators, and here too, there is a risk the new supervisor might suffer from a lack of sector-specific knowledge and granular awareness of industry practices. For law firms, this model represents the most disruptive and risky option, albeit it with no associated (we are told) increase in costs.   

Conclusion

Clearly the first two of these options would mean fewer changes for law firms, whilst the latter would mean the landscape shifts considerably. HM Treasury aims to decide on the model to be adopted in early 2024. Meantime it is inviting feedback on its consultation exercise. Although praise for the SRA amongst its regulated community may not come naturally, most law firms will agree that industry specific knowledge and an understanding of the context in which they operate, is invaluable. In terms of this consultation therefore, it may be best to opt for better the devil you know.

This article was first published in New Law Journal.

Further information

If you have any questions regarding this blog, please contact Julie Norris in our Regulatory team. 

About the author

Julie Norris is a partner in the Regulatory team. She predominantly acts in legal services sector, advising law firms, solicitors, and barristers on regulatory compliance, investigations, adjudication, enforcement, and prosecutions.