Anti-money laundering: Switch to FCA will cause confusion and higher costs
Law societies on both sides of Hadrian’s Wall have set out strong opposition to government plans to transfer anti-money laundering (AML) supervision to the Financial Conduct Authority (FCA).
Of the responses seen to date, there was opposition from the law societies of England and Wales, Scotland and Birmingham, as well as the Bar Council and Council for Licensed Conveyancers (CLC), but CILEx Regulation (CRL) welcomed the move.
HM Treasury announced in October its intention to strip AML supervision from all the legal regulators in the UK and make the FCA the single professional services supervisor (SPSS) for AML.
Responding to the subsequent consultation on the powers the FCA will need, the Law Society of England and Wales said the move would create “major operational and strategic risks for the profession while offering no proven benefits”.
The society said no comparable European jurisdiction uses a financial regulator to supervise lawyers for AML and counter-terrorist financing (CTF).
“The UK risks becoming an outlier, driving work offshore and eroding the UK’s competitive position – an impact already visible in shifting client behaviour,” it warned
President Mark Evans said: “The AML reforms risk greater fragmentation, not simplification, and fly in the face of the government’s own growth agenda.
“The speed at which the government is consulting on the reforms is a concern, as these changes will fundamentally reshape AML/CTF oversight across all sectors.”
Birmingham Law Society highlighted the confusion “dual regulation” of law firms by the Solicitors Regulation Authority (and other regulators) and the FCA could cause consumers, and the application of ‘fit and proper person’ tests to a profession that was already “highly regulated and trusted by consumers and businesses”.
There was also a danger that “the legal professional privilege of clients may be undermined by a SPSS that had “no experience in protecting this important legal principle”.
Cary Whitmarsh, chair of the society’s professional regulation committee, commented: “We think the additional regulatory obligations will lead to increased costs of legal services for consumers that will have an adverse impact on the government’s growth plans.”
The Law Society of Scotland agreed that the proposals would lead to regulated firms dealing with multiple supervisors and increased costs.
“It is important to consider that many law firms in Scotland are sole traders or small partnerships, with many firms servicing remote communities.
“The FCA lacks the detailed knowledge required to AML supervise the Scottish legal profession effectively. Differences in law and consequential nuances in areas such as Scottish conveyancing practice and the operation of client accounts demand specialist understanding.”
The Bar Council said it too was concerned about losing sector-specific regulatory expertise and reducing the efficacy of supervision, “at the same time as increasing costs and imposing a disproportionate burden on barristers”.
This increase in the regulatory burden was “antithetical to a pro-growth strategy and should be avoided”.
The Bar Council said that only 2.5% of the nearly 18,000 practising barristers did work within the scope of the Money Laundering Regulations.
“It is also important to recognise that the supervised population of the Bar Council is individuals rather than firms.
“We consider that the consultation does not acknowledge the impact of this key difference, and instead seeks to apply a model of supervision designed for firms of solicitors and other professionals to a profession of which a large proportion comprises individuals in self-employed practice.”
Barbara Mills, chair of the Bar Council, said “the few barristers operating in specialist fields that may fall within the regulatory scope” were generally instructed by other professionals obliged to address any AML/CTF issues before instructing counsel.
“The different roles of legal professionals, and their differing risk profiles, should influence the shape of the new regime.”
The CLC was strongly opposed too, saying the consultation had “heightened” its original concerns.
“We sense that there is a real risk of the AML regime becoming weakened, with key knowledge and insight cultivated by each supervisor being lost or diminished, and for the growth agenda of the government to be undermined.”
Duplication of regulatory activity was “quite unavoidable”, the response went on. “The CLC must be very clear that increased costs arising from the FCA’s role will not be able to be balanced by reduced costs for the CLC in delivering its own consumer protection and regulatory activity.
“Indeed, during the transition period it is likely that the cost of AML work for the CLC will increase considerably as we continue with supervision while supporting the FCA in developing its new powers and are involved in the administrative transition to the new regime.”
However, CRL welcomed the transfer of AML regulation to the FCA, “provided the model remains proportionate, risk based and coherent with the Legal Services Act framework and the new economic crime objective.”
CRL said it supported “the objective to improve AML and CTF supervision through a single public sector supervisor” and was “ready to engage on transition planning, guidance development and supervisory design”.
Finally, 58% of legal professionals are concerned about the shift to the FCA, according to a survey by VinciWorks and Compliance Office.
Concerns about the FCA’s approach were clear, especially the potential implications for confidentiality, the handling of privileged material and the preservation of sector-specific understanding.
Ruth Mittelmann Cohen, head of legal compliance at VinciWorks, said: “Many legal professionals raised the issue of legal professional privilege as their first concern. The sector is accustomed to regulators who understand legal practice and the central role privilege plays in it.
“With more than half of respondents reporting concern about how privilege will be managed in the future, it is clear that firms want reassurance that existing safeguards will be maintained.”
When asked which potential impact of FCA supervision would be most significant, the largest share of the 204 respondents selected the its data and reporting requirements (29%). A further 26% identified a loss of legal-sector nuance, and 21% identified stricter enforcement or higher penalties. Cost and regulatory burden accounted for 21%.
More than half of respondents (56%) expected that they would have to make at least a moderate or very significant investment as a result of the switch.
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