The new direction of travel
The Government has now given the profession a clearer view of what is coming when the Financial Conduct Authority becomes the single professional services supervisor for anti-money laundering and counter-terrorist financing. For solicitors’ firms, the direction of travel is now settled. AML supervision is moving away from the SRA and towards the FCA. What is rather less clear is whether this will make regulation simpler, cheaper or more proportionate in practice.
The Treasury’s response to its consultation is carefully reassuring in tone. It says the Government wants to build on existing powers, avoid unnecessary burdens and preserve a risk-based approach. That is welcome. But many firms will reserve judgement. The legal profession has heard the language of “risk-based” regulation many times before, only to find that it often turns into longer forms, more file notes, more evidence trails, more training records, more screening results, more internal approvals and more regulatory anxiety if something later goes wrong.
The Government is not proposing to import the full financial services regulatory model into law firms. That is important. The FCA will supervise under the Money Laundering Regulations, not under its wider Financial Services and Markets Act toolkit. Law firms are not banks, and it would be wholly inappropriate to treat them as though they were. Even so, the FCA will arrive with significant powers, a different regulatory culture and a reputation for expecting firms to evidence compliance in detail.
Another register, another process
One of the first practical changes will be registration. The FCA will maintain a public register of professional services firms carrying out AML-regulated activity. Registration will become the gateway to lawful participation in in-scope work. In theory, this provides transparency and helps identify unsupervised firms. In practice, many solicitors’ firms will see another register, another process and, very probably, another cost.
There will also be a power to cancel registration where a firm no longer carries out regulated activity. The Government says this will be administrative rather than punitive and that safeguards will apply. That is sensible, particularly because legal work is not always continuous. A firm may do very little AML-regulated work for a period and then take on a conveyancing, probate, company or trust matter. Losing registration because of inactivity would be a serious problem if it disrupted future or live work.
The broader fit and proper test
A more important development is the extension of the regulation 58 fit and proper test to legal and accountancy service providers. This is broader than the current regulation 26 approach, which focuses on criminal convictions involving beneficial owners, officers and managers. Regulation 58 allows a supervisor to consider integrity, competence and compliance history.
That is significant. AML compliance history may become more directly relevant to whether owners and managers are regarded as suitable to carry on regulated work. Poor systems, repeated file review failures, weak training, inadequate matter risk assessments or lack of senior management oversight may not simply be matters for improvement. They may form part of a broader regulatory judgement about the firm and those who control it.
There is some reassurance. The Government does not intend to bring legal and accountancy providers within regulation 58 before transition to FCA supervision. It has also stopped short, for now, of confirming the harder-edged proposal that would have created a standalone offence of acting without having passed the test. But firms should not take too much comfort from that. The message is still that AML governance, compliance history and senior management accountability will matter more, not less.
FCA supervision: risk-based, but with sharper edges
The FCA will also gain two supervisory tools that the SRA does not currently have in this context: the power to require a skilled person review and the power to issue directions requiring or prohibiting particular action. These are presented as early intervention tools, designed to resolve problems before formal enforcement becomes necessary.
That may be how they are intended to work. Whether firms experience them that way is another question. A skilled person review can be expensive, intrusive and disruptive. A direction may be supervisory rather than disciplinary, but it is still a formal regulatory requirement. The Government says these powers will be subject to a reasonableness safeguard. That is helpful, but it will not make the process feel light-touch to a firm on the receiving end.
Guidance and privilege
The response also deals with guidance. Responsibility for approving legal sector AML guidance will move to the FCA, although the Government accepts that guidance should still be drafted with practitioner input. This is a sensible compromise. AML guidance for solicitors must reflect how legal work actually operates. Conveyancing, probate, corporate work and trusts do not present risk in the same way as banking.
However, firms should not assume that FCA-approved guidance will be lighter. If anything, it may become more significant. Once guidance has FCA approval, firms may be expected either to follow it or to be able to explain, with evidence, why they took a different approach.
Legal professional privilege has been preserved. The existing protection in regulation 72 will remain, so the FCA will not be able to compel production of privileged material through its AML information powers. That is essential. However, firms should remember that many AML compliance documents will not be privileged merely because they sit on a legal file. Client due diligence records, risk assessments, policies, training logs and screening records will usually be compliance material rather than privileged legal advice. Firms will need clear processes for identifying, redacting and protecting genuinely privileged material during any supervisory inspection.
The unresolved problem of double jeopardy
The most uncomfortable issue is double jeopardy. What happens when the same facts raise AML concerns for the FCA and professional conduct concerns for the SRA? A weak source of funds process, for example, may be an AML issue. It may also raise questions about supervision, competence, client protection, lender obligations, fraud risk or the firm’s systems and controls.
Many firms would have preferred a clear statutory protection against being pursued twice for the same underlying failing. They have not got one. Instead, the Government proposes co-operation. The FCA and the professional bodies will be expected to co-ordinate investigations and sanctions where appropriate, supported by information-sharing gateways and duties to co-operate.
That is better than nothing, but it is not the same as a hard guarantee. Co-ordination does not necessarily mean one regulator, one process, one set of questions, one outcome or one appeal route. Firms may still face the FCA looking at an AML breach and the SRA looking at the wider professional implications. For firms hoping that the new regime would remove duplication, this is the part of the response that feels least convincing.
Fees and transition
Fees are another unresolved concern. FCA AML supervision will be funded on a full cost-recovery basis, with the detailed fee structure to follow in a separate FCA consultation. The Government has noted concerns about duplication and the impact on smaller firms, but it has not promised that the total regulatory bill will not increase.
That omission matters. Firms already pay SRA fees, practising certificate fees, insurance premiums, compliance staffing costs, training costs, technology costs and, in many cases, the Economic Crime Levy. A further FCA fee may be justifiable in regulatory design terms, but it will still be another cost to absorb. For smaller firms, particularly conveyancing and private client practices, that may be far from trivial.
The transition period will also need careful management. The Government says the FCA and existing professional bodies will be required to co-operate and share information during transition. The aim is to avoid duplicated data requests and overlapping inspections. Again, the intention is good. But transitional periods often create precisely the duplication they are meant to avoid, as the old regulator remains involved while the new one builds its systems, gathers data and learns the sector.
The SRA does not disappear
The SRA will not disappear from economic crime issues either. The Government has resisted calls to repeal the economic crime objective introduced for legal regulators by the Economic Crime and Corporate Transparency Act 2023. That means the SRA will retain a wider professional interest in fraud, sanctions, bribery, tax evasion and related risks, even after AML supervision moves to the FCA.
The formal division of responsibilities may be clear on paper, but real files do not always divide themselves so neatly. A transaction involving poor AML checks, suspicious funds, a lender concern, inadequate supervision and possible client account risk may still attract attention from more than one direction.
What should firms do now?
The immediate answer is not panic, but preparation. Firms should ensure that their AML framework is current, evidenced and genuinely applied. Firm-wide risk assessments, policies, matter risk assessments, source of funds and source of wealth records, screening results, training records, file reviews and senior management oversight should all be capable of standing up to external scrutiny.
Owners and managers should also take the broader fit and proper direction seriously. AML compliance is no longer just a technical matter for the MLRO or compliance team. It is increasingly part of the firm’s governance record and may affect how the regulator views those who own and manage the business.
Proportionate reform, or regulatory accumulation?
The Treasury response is not the most alarming version of reform that could have emerged. The Government has stepped back from some proposals, preserved privilege, declined to give the FCA wider perimeter powers and repeatedly used the language of proportionality. That should be acknowledged.
But firms are entitled to remain sceptical. The new regime may look coherent from Whitehall. Whether it feels simpler from the compliance desk of a solicitors’ firm is another matter. The FCA will bring new powers, new fees, new expectations and a new supervisory culture. The SRA will remain relevant to wider professional conduct and economic crime issues. The risk of double handling has been managed, not eliminated.
For now, the sensible assumption is that AML supervision will become more formal, more evidential and probably more expensive. The firms best placed to cope will be those that can show not merely that they have AML policies, but that those policies are understood, supervised, tested and applied in practice. The FCA regime is coming. Whether it turns out to be proportionate remains to be seen.
