Both the SRA and FCA have controls and restrictions to stop the misuse of client money accounts and the breaches or abuse that has happened within the financial services industry. There have been a number of high profile cases recently which incurred fines or liquidation, highlighting that even financial services firms are still struggling with the correct operation of these accounts. Since 2003, Global Currency Exchange Network (GCEN) & their sister company Global Custodial Services (GCS) have been successfully helping clients with their money management requirements. Being authorised and regulated by the FCA, we speak to their Director, who touches on why law firms need to tread carefully when handling client money.
Over £700,000 in fines, 20 solicitors and 3 firms prosecuted, 3 solicitors struck off – All in 12 months” SRA quote.[1]
Prior to the increased focus and tightening of regulation around the management and handling of client money, what were the most common ways in which these needs were serviced?
More common than not, client’s funds were deposited into a law firm’s main client bank account until the appropriate time for the funds to be transferred, as per the client’s instruction. This was problematic for numerous reasons and the client funds were susceptible to misuse, for example: being used for transactions that were outside of the remit that a lawyer’s client account can be used for.
The general lack of awareness of potential client money solution providers lead many to believe that banks were the only place to turn to, but often they were slow, inflexible and expensive to use. If using a bank was not an option, some would attempt to manage funds in-house without the knowledge or processes required to be regulatory compliant.
How big is this risk and why is it so prominent?
It is unsurprising that law firms are so susceptible to the sophisticated methods that criminal organisations employ to launder money; nowadays it is acknowledged as a global threat for the entire business world. Fulfilling ad-hoc payments on behalf of a client, which fall outside of the agreed legal representation may seem like a straight forward and value adding task and it often is, however this constitutes a breach of the SRA regulations.
“Law firms are not regulated to operate their client accounts as a banking facility for clients”
Paul Phillip Chief Executive Officer of the SRA
The client account must not be used as a banking facility, as not only does this present an increased money laundering risk - especially if acting on behalf of an overseas client -, but if managed in-house, it also requires an adherence to the most stringent processes and procedures as defined by the FCA.
The overheads in managing and monitoring each transaction to ensure its source legitimacy is critical, and this is where internal expertise is often found lacking or simply under resourced. Legal firms wishing to service this additional requirement for their clients have various ways to fulfil this need whilst ensuring compliance with the regulator.
Fines and prosecutions are on the increase. In the last 12 months, over 20 solicitors and three law firms have been prosecuted. Are there similar repercussions for other FCA regulated firms that have fallen foul of the aforementioned risks you see with SRA regulated firms?
Absolutely, there have been similar fines handed out by the FCA over the years due to non-compliance and this presents a heavy burden to firms who must stay abreast of the evolving regulatory position. If a legal practice is not enforcing the required policies and procedures to ensure compliance, the repercussions could be as severe as imposing custodial sentences. Regardless of the solution you choose to utilise, whether outsourcing or fulfilling in-house, it’s imperative that any legal practice understands and acknowledges the regulatory requirements in handling client money.
Banks are becoming more risk adverse. What other options or solutions have you seen within the legal sector. Do you need specific permissions to operate a client money account?
Some banks have had their fingers burnt and have lost their appetite in managing client money accounts due to the increased risk of money laundering and due to the general transactional nature of such accounts. This heightened regulatory awareness across many industries (finance and legal included), has resulted in the arrival of a new ‘breed’ of client money specialists that compete with traditional banks. These new providers hold Part IV permissions granted by the FCA (under the FSMA 2000) and they allow for greater flexibility, fast track opening of bank accounts, streamlined and auditable processes allowing for the efficient management and handling of client money, all of which can sit alongside the existing law firms banking set up.
While most legal firms are aware of the rules associated with managing client money accounts, we see some potential issues when inadvertently conducting payments outside of the main legal representation.
This is obviously not a core part of a law firm’s business, and in most cases, will be ancillary to day to day business. Are there specialists in the financial services industry who can assist law firms with client money accounts?
There are specialist providers who focus purely on providing client money banking services enabling firms to offer a more transactional service to their clients. These specialists have purpose-built systems and processes which are regulatory compliant and operate with the necessary controls to mitigate the AML risk. Unlike banks, these specialist providers offer greater flexibility and can often adapt their systems to meet the needs of most organisations, regardless of transactional volume. Outsourcing this heavy lifting can be far more cost effective than building an in-house solution.
Delegating this burden to a client money provider can reduce much of the risk, as well as possibly lowering a firm’s overheads, including insurance premiums.
What are the common hurdles clients typically need assistance on?
While most legal firms are aware of the rules associated with managing client money accounts, we see some potential issues when inadvertently conducting payments outside of the main legal representation. Having the systems and processes in place is often the most challenging and cumbersome. Managing daily reconciliations, daily AML checks, complex transaction monitoring, daily calculations, breach reporting & staff training are some of the headline challenges that need specific expertise and to be managed day to day.
From your extensive experience working in the finance sector with banks and payments, can you give our readers some key areas to focus on to limit this obvious AML risk that needs managing?
Regulators constantly need to update and change their regulations, guidance and industry standards to combat the increased money laundering threat and as such, focus should be applied here on a regular basis.
Whether using in-house solution or outsourcing to a specialist third party you must ensure your accounting & IT systems adapt as the industry evolves. Relationships with banking providers, 24/7 access to account & customer support, extensive staff training and of course having a highly qualified team monitoring all the daily compliance requirements as mentioned above are key.
Andrew Fundell
Director
Andrew Fundell, Director of Global Custodial Services Ltd (GCS), a specialist financial services provider offering a portfolio of client banking solutions including payment & treasury services for corporates, law firms, investment firms, institutional investors, HNWI’s and Family offices. Authorized and regulated by the FCA and fully licensed to hold client money, GCEN and GCS transact over USD $4bn annually & strives to maximise efficiencies within the clients domestic or cross-border payment operations and adhere & operate to the most stringent set of client money rules, defined by the FCA as the “CASS money rules”.
[1] http://www.sra.org.uk/sra/news/press/client-banking-warning-notice.page
