As most high street firms will agree, these are tough times for those involved with residential conveyancing. So far as the much used analysis of opportunities and threats is concerned it is much easier to set out threats first and opportunities second, but there could be brighter times ahead as the property market changes for those firms that are hoping to develop their conveyancing services to a more sustainable and profitable model.
Increased demands
As to the threats first, the regulatory burdens do seem to continue to grow as time goes by. The Money Laundering Regulations were first extended to legal services 20 years ago by the 2003 version of these requirements. The new rules caused a good deal of consternation and concern at the time, but in retrospect the requirements then were a good deal simpler than the regime that is now in place.
Client identity checks were only required if the client was not well known to somebody in the firm, and the wider checks now required as to who ultimately controls any company by way of beneficial ownership were not introduced until the later 2007 version of the regulations.
Fast forward to the present day and the latest version of the Legal Sector Affinity Group AML Guidance 2023 instead now provides at para 6.2 that:
“There is no provision in the Regulations for waiving CDD requirements on the basis of longstanding or personal relationships. Taking this approach will not satisfy the requirement to undertake independent verification, though these factors may inform your risk-based approach.”
The net effect of this new requirement would seem to mean that never mind that as a partner in your firm you are quite clear who your parents are, if and when they wish to move house you will still have to conduct some form of identity check on them. Quite how this will help to fight crime is not apparent, as are the questions of how your “risk based approach” might be adapted, but it would seem to mean that you must do more than simply confirm on the file that “this is my mum and dad”.
Risk assessments
Other than that, conveyancing solicitors in particular must have a risk assessment exercise in place not just to address the firm’s exposure to money laundering and the much more remote issue of terrorist financing as well, but now the even more unlikely risk of “proliferation finances” as well.[1] The guidance note which accompanies these regulations acknowledges that such risks are very low for law firms providing high street services, but again form will prevail over substance and the firm that has failed to conduct such an exercise risks being found to be in breach of the regulatory requirements.
As if this were not enough, the risk burden for conveyancers in particular has been made that much the greater if and when sanctions breaches arise. As a result of changes made by part 3 of the Economic Crime Act 2022 having financial dealings with any “designated person” as listed by the Office for Financial Sanctions Implementation (OFSI) has become a strict liability offence. As such liability could even go beyond dealings with the firm’s own clients and arise in relation to dealings with the counterparties as well. For more on this see the SRA’s warning and guidance notes of the 28th November 2022 (“Complying with the UK sanctions regime” and “Sanctions regime guidance helps firms stay compliant”). The risks of encountering a sanctions target will be very slim for the great majority of firms but the imposition of financial penalties has become more likely if any such circumstances do ever arise.
Government pressures
Recognising the increasing regulatory burden Paul Philip, Chief Executive of the SRA, warned at the Law Society’s Risk and Compliance Conference earlier this year that the regulatory burden would be getting greater with time. In so doing he claimed that the SRA was the ‘piggy in the middle’ between the firms that they regulate on the one hand and the ever-growing burden of financial crime legislation from Government on the other. Despite expressing sympathy with the profession in relation to the challenges that it now faces, the SRA has not yet to date published the full list of issues that will feature in a valid AML risk assessment and resulting policy so far as they are concerned. Based on our own experience of working with a number of member firms facing such inspections of late we have found an increasing tendency to judge firms as being non-compliant with the regulatory requirements in relation to things that they are not specifically required to do. Where this is the case no sanctions are likely to be imposed but the audit report will be likely to frustrate.
A good example of this would be the criticism of firms for not dealing with simplified due diligence at all, even though there are no instances in the firm where this would be applicable. A further example is the failure to list all of the different situations where enhanced due diligence would be permissible under r.33 MLR 2017 even though they do not apply within that firm. Another increasingly common example is a failure to have stated that the process of reliance (r.39), whereby customer due diligence collected elsewhere might be used by the firm in place of conducting CDD for itself, has not been adopted by the firm.
Beyond the woes of the legal profession and its regulatory arrangements there are also the frustrations of dealing with the major estate agencies in particular that have teams of people continually chasing up firms for news of completion dates. These are supposedly to report back to clients, but are actually a fairly obvious attempt by the agents to meet their own costs targets. These, of course, have become increasingly challenging to meet as the property market has slowed down of late.
All in all, little wonder therefore that many newly qualified solicitors will decline job offers to join the firm’s conveyancing team and, according to one recent report, 52% of conveyancers would leave the profession if they could realistically do so.[2]
Opportunities
And the opportunities? There may well be some comfort through the laws of supply and demand. Many firms are reviewing whether it is worth maintaining smaller residential property teams in particular in the light of the costs of professional indemnity insurance as well as the staffing difficulties of replacing older solicitors and legal executives as they retire. This should suggest that others might therefore find it possible to increase fee estimates for conveyancing transactions. There may well be a lack of confidence to do so in the short term, but if so, and if your firm is one of the many where the fees earned by your conveyancing team do not adequately compensate for the work and stress involved, perhaps an initial toe in the water exercise on higher prices should be considered. All being well this could then be the first step in developing a more remunerative and less stressed conveyancing service.
For firms and their clients alike, we must certainly hope so.
[1] See the Money Laundering Amendment Regulations 2022 and our article “Increased Obligations on Money Laundering and Financial Crime: Proliferation Risks”
[2] “Pricing Confidence, Profit Awareness, Strategy and Values” Big Yellow Penguin Consultancy