Gould: Expensive learning curve for the FCA
The government’s decision to rationalise the oversight of anti-money laundering (AML) supervision could be a precursor to the entirety of legal regulation, a leading practitioner has suggested.
John Gould, chair of London firm Russell-Cooke, also said giving government more power over lawyers could be an error in the long run.
HM Treasury announced last week [1] that the regulation of all lawyers’ AML activities would move from nine different regulators across the UK to the FCA.
Mr Gould, author of the textbook The Law of Legal Services, said: “The move creates a potential precedent of the government rationalising over-complex regulation of lawyers by appointing its own agency. This could, in years to come, have a broader application.”
The Legal Services Board’s longstanding position has been in favour of a single regulator for the profession, while just before last year’s election, the then Lord Chancellor, Alex Chalk, said there was “a growing case” to review [2] the regulatory framework created by the Legal Services Act 2007 and that he had asked officials to look at it.
The Treasury said that the FCA, as a public corporation, had “the appropriate degree of independence from ministers” – a concern raised by the legal sector in particular.
But Mr Gould said: “Experience from the US suggests that one might regret, at some future time, giving government more power over lawyers. The history of the FCA, and the FSA before it, is that it is responsive to government policy direction – as the events leading to the 2008 banking crisis tend to show.”
Specifically on AML, the solicitor warned that there could be an “expensive learning curve” for the FCA, while there was a real risk of duplication. “Dishonesty and misconduct often go hand in hand with AML non-compliance,” he observed.
“Perhaps the FCA will have the confidence and knowledge to focus its efforts away from the endemic failures of firms to deal with routine recording of compliance, and towards disrupting criminal activity.
“It has been argued that routine AML compliance by the professions has little, if any, effect on criminals and that its enormous cost is largely wasted. Perhaps the bracketing of lawyers and accountants together within the proposed regime is, in part, a recognition that the distinction between them is gradually blurring.”
As well as lawyers, the AML oversight of accountants and trust and company service providers is moving to the FCA.
Mr Gould continued: “The key question is whether the new approach can drive down the costs of compliance indirectly borne by consumers, whilst complying with international obligations and not making life easier for criminals.
“Since primary legislation is likely to be required, and many important decisions are yet to be made, it could be years before we really understand what this means.”
Financial crime expert Steve Smith, a partner at Eversheds Sutherland, described the government’s decision as bold: “A single, independent supervisor promises greater consistency and could strengthen the UK’s fight against financial crime.
“But professional services firms aren’t financial institutions — they operate under different risk profiles and regulatory expectations. The FCA will need to upskill and resource appropriately to reflect that nuance.
“For regulated firms, this marks a significant shift, and while it may feel like an added regulatory layer, it also presents an opportunity to streamline standards and improve outcomes.”
Meanwhile, anti-corruption campaign group Transparency International has strongly welcomed the move to the FCA.
“For far too long, the UK’s professional services sector has been used as the gateway through which corrupt actors, kleptocrats and criminals access Britain’s financial system to launder their dirty money and stash the proceeds of crimes.
“Instead of acting as enablers of economic crimes – knowingly or unknowingly – firms providing services such as legal advice, accountancy and company formation have a critical role to play as the first line of defence in identifying money laundering risks.
But we found that the current fragmented regulatory landscape to be totally inadequate… We also raised concerns that private sector regulators acted as trade bodies for those they were supposed to regulate, leading to conflicts of interest and weak enforcement action.”
To be a success, however, the FCA needed to manage the transition well, have sufficient resources, and be given the right powers, “particularly for the legal sector which poses unique challenges”.
For example, the Solicitors Regulation Authoritycan issue statutory production notices to compel law firms to hand over privileged information for regulatory purposes.
“Even the police do not have this power, instead relying on court orders. Government needs to consider whether the FCA has sufficient tools to do the same, where necessary, to fulfil its new role.”