It’s been a bit of a wild ride in legal services regulation recently. We’ve had the Axiom Ince and now SSB reports, with deep criticisms of the SRA. Only a few weeks ago, the Mazur judgment seemed to pull the rug out from what had always been nodded through as acceptable practice of litigation. And last week, the announcement (published during the SRA COLP/COFA conference no less) that the Financial Conduct Authority (FCA) would be taking over as the single anti-money laundering (AML) supervisor for the professions, wresting from the SRA the powers that they have so enthusiastically wielded in recent years.
Since the FCA bombshell, there has been a flurry of information telling us what is going to happen and what we need to know. It’s all complete speculation, however. And in that spirit, this article isn’t telling you what we know but rather what we should be asking over the next several months:
Is it actually going to happen?
In the solicitors’ profession, the oncoming march of the FCA has been accepted as inevitable. But let’s take a breath. Whilst I wouldn’t want to doubt this government’s will, even the most charitable supporter of them would find it hard to claim that they’ve done everything they initially said they would. Winter fuel allowance was made means-tested only to be reversed. Cuts to disability benefits were themselves cut following protests from the backbenches.
Now, I appreciate that AML supervision is unlikely to affect the public consciousness in a similar way but there is a question here. This isn’t the first time a government has proposed bringing something under a single regulator or supervisor. Back in 2021, the government consulted on insolvency regulation, with one of the considerations being whether a single regulator should be implemented. The Institute of Chartered Accounts for England and Wales (ICAEW) strongly lobbied against this and, in 2023, this proposal was reversed. Given the other matters that the government has on its plate at the moment, might we be looking at something similar?
Even if it does progress, it could take a long (long) time.
Can the FCA handle it?
Both the SRA and the ICAEW have expressed disappointment and concerns over how this change is going to work, with the ICAEW highlighting the increased costs and regulatory burdens on firms and the SRA questioning how the changes will work in practice. The FCA has been breezy in their response (as you’d expect). But it bears reflection: the FCA will be responsible for supervising the AML activities currently devolved to over 20 professional bodies, of which the SRA is the largest. As we all know, the SRA has poured huge amounts of resources over the last few years to build up their AML arm – not just in terms of personnel but also their guidance, commentary and activities, with audits, investigations, resources, consultations and thematic reviews keeping them busy.
There are two issues. One is the FCA’s knowledge and experience. The second is their resourcing.
To take the first issue: do the FCA actually understand AML? Well, yes. They’ve been on the same journey that we have in the legal profession and people who work in the financial services industry will tell you how strictly the AML regime is applied.
Do they understand AML as it relates to legal services? Probably less so, but that’s where the second issue might provide an answer. It would, arguably, be throwing the baby out with the bathwater if the FCA did not draw upon the work that the other supervisors (not just the SRA) have been doing in their professions. In practical terms, that could extend so far as absorbing teams and assimilating existing resources, or perhaps even sub-contracting out some of the day-to-day oversight. In other words, this brave new world may not look all that different.
Are the FCA and the SRA approaches all that different?
A lot of people are saying: yes, they are. Historically, financial services regulation has had a strong focus on audit trails and record keeping. Arguably, this has been less enshrined in the legal profession’s approach to AML but it really shouldn’t be anymore.
For years, the SRA, Heads of Compliance and people like yours truly have been repeating: “if it’s not written down, it didn’t happen”. If the FCA expects to see the same rigorous record-keeping in respect of its overall AML supervision as it does towards its general regulation, then most firms who take their compliance seriously are probably in decent shape.
The SRA has been expecting more and more of us, with the AML data collection exercises now part of our regular summer fun. The details of what the FCA requires, or the format that it is in, may look different but the foundations are likely to be very recognisable.
More broadly (and acknowledging again that what we know about what the new model of supervision is going to look like is absolutely nothing), the fact is that we are all following the same principles. We rely on the same legislation and the tools at our disposal are really nothing new, sector by sector: risk assessments (at firm and at individual client and matter level); detailed policies; robust procedures to conduct and record due diligence; appropriate oversight; and a commitment to ongoing awareness and training.
Everyone who supervises AML requires these things because they are the backbone of a strong AML compliance regime, no matter what your profession is. Whether law firm, accountant, financial services or other, if you have these in place, you are on the right track.
Will we see criminal prosecutions?
Plus ça change seems likely for much of any shift over to the FCA but there is a notable difference. Lots of comments have pointed to the fact that the FCA can and does bring criminal prosecutions for AML breaches. This is not really something we’ve seen in the legal profession (bar the very occasional egregious example of a solicitor being involved in money laundering or tipping off, which have been prosecuted by the CPS, rather than the SRA). Indeed, a complaint we often hear is that the SRA are taking action against “administrative” breaches, such as not having a firm-wide risk assessment; their inspections are not uncovering examples of money laundering.
On the other hand, the FCA does have a track record in prosecuting. The notable example is the prosecution against Natwest in 2021, where the taxpayer-owned bank was fined £265m for accepting roughly the same amount of cash in bin bags (plus another £100m or so in other forms). And the FCA itself states that it is ramping up enforcement action.
Rather than providing a re-focus on AML compliance though, this is just another element of the regime we are already accustomed to. We already speak about the importance of appreciating why AML compliance is important: as well as acknowledging regulatory action, reputational detriment, and the social cost of money laundering and financial crime, we all know there is a criminal element to the AML regime.
We’re solicitors, after all: is the threat of being on the wrong end of a criminal prosecution really going to be the only thing that makes us conform to our AML obligations? If the answer is yes, we’ve got bigger problems than just trying to understand what the FCA are going to do.
What should I be doing now?
In short: it’s business as usual for the time being. We all know we need to have a robust AML compliance regime in our firms and we all have a long list of the things we keep meaning to do. So keep plugging away at your file reviews, your training programme, your policy updates.
But the uncertainty could work for you too. If you know that there are things you need to get your house in order, your business case to the Board could be bolstered by the upcoming changes. Whether it’s:
- Another team member to help with CDD or file reviews;
- Room in the budget for an independent AML audit; or
- Protected time and management support for the overdue AML training
now is the time to take stock and see what you need, with an eye on the horizon.
We are running a free AML workshop on 19 November in association with FirstAML – places limited.
