Legal regulators need to introduce common standards for providers of third-party managed accounts (TPMAs), a leading payment processor has argued.
Shieldpay received a government grant through Innovate UK last autumn to develop TPMAs, escrow arrangements that aim to eliminate the need for lawyers to have client accounts, with all the risks that come with them.
The processor’s digital escrow facility took the place of conveyancers last spring in the UK’s first fully digital mortgage settlement.
The Solicitors Regulation Authority is introducing new rules in November to facilitate use of TPMAs, and the Council for Licensed Conveyancers is likely to follow in January.
Shieldpay argued in a newly published ‘white paper’ that the Financial Conduct Authority or Legal Services Board could lead an initiative to develop common standards for TPMAs.
“For clients, this would provide greater clarity on what they should expect and what they need to know when taking advice on the use of a TPMA.
“For firms, a singular regulatory benchmark would give them greater confidence in choosing TPMAs, as well as the practical awareness of how to successfully integrate their usage into the day-to-day workings of their business.”
Shieldpay said that whoever led the initiative, “some form of recognised accreditation” could be introduced.
The processor said achieving interoperability with other providers was essential if the benefits TPMAs offered were to be “adopted at scale” across the property market.
“Not only does this present a technical design challenge, but it will also require a careful approach to collaboration in the interests of ensuring good practice as far as competition law is concerned.”
The white paper outlined the benefits of using TPMAs in property transactions, as well as some of the pitfalls.
TPMAs use a single central client account to handle transactions on behalf of buyers and sellers and mortgage lenders, transactions that would otherwise take place “sequentially along a chain via multiple client accounts”. With TPMAs, financial transfers take place simultaneously.
Shieldpay said “full visibility of a chain’s status and the simultaneity of transfers” would provide greater certainty in conveyancing transactions.
“Real-time notifications” could be sent to firms and clients that completion has happened, triggering the release of keys from estate agents and departure or arrival of removal vans.
Shieldpay said that just as there was “no prejudice to a firm’s service or standing” if it chose to outsource legal cashier work, it should be “perfectly manageable to integrate the use of TPMAs seamlessly in the normal work practices of law firms”.
Removing client money-handling from law firms removed “the human risks associated with holding client money, such as misdirecting funds or internal rogue actors”.
Shieldpay said use of TPMAs could help smaller firms become “as resilient against attack” as larger ones.
“TPMAs will undoubtedly become targets, but their business models are predicated on being more secure than law firms, and they should be better equipped to deal with these attacks.”
Law firms using TPMAs would no longer need to rely on transactions taking pace within banking hours, and improved risk management profiles could lead to reductions in firms’ indemnity insurance premiums.
Insurer QBE, in its contribution to the white paper, predicted that law firms routinely using a TPMA for transactions would “inevitably experience an improvement in the risks of civil claims and SRA accounts rules breaches and investigations”.
This lower risk profile “should result, over time” in reduced indemnity insurance premiums.
As far as pitfalls were concerned, risk management systems used by TPMAs “might mean they will not accept payments in relation to certain clients or transactions”.
Shieldpay went on: “TPMAs will not be suited to all firms, all clients or all matters. The choice of how services are provided will therefore always remain with the lawyer, who will select what is appropriate for their client as is expected by the relevant codes of conduct.
“Firms will not want to find themselves in a position where their TPMA provider blocks a payment after client instructions have been received and completion on a transaction is approaching.”
Another pitfall might be that if interest rates rose, law firms would not benefit from interest on client accounts, since that would be subject to contractual arrangements with the TPMA provider.
Shieldpay said TPMAs would have their own indemnity insurance, “the level of which will vary but is likely to exceed the minimum required for law firms” plus additional cybercrime cover.
However, “further discussion and guidance” was required to establish “who exactly a client would be entitled to sue if something were to go wrong”, and whether law firms would be the target for claims arising from faults by the TPMA provider.
Shieldpay said it now has more than 35 firms using its services for general client monies, merger and acquisition transactions, commercial rent deposits, claims management and probate.
It has recently created a legal services advisory board to help with the development on TPMAs in property work, including representatives of eight law firms: My Home Move, Fletcher Longstaff, The Partnership, Angela Viney, LegalZoom, Convey Law, WYM Legal and Total Conveyancing Services.