FCA to Become Sole AML Supervisor – What This Means for Law Firms

The UK Government has announced that the Financial Conduct Authority (FCA) will take over Anti-Money Laundering (AML) and Counter Terrorist Financing supervision for law firms, replacing the Solicitors Regulatory Authority (SRA). This change is part of wider reform aimed at simplifying AML oversight across professional services with the appointment of the FCA as the Single Professional Services Supervisor (SPSS) and marks a major shift in how AML compliance is regulated.

Few details were published as part of the announcement, including when the changes will be implemented. A consultation on the powers the FCA should have as SPSS is due in early November, which should provide us with more detail. In the meantime, we foresee various issues for solicitors arising from the decision to move to a single AML supervisor.

Key Points

1. FCA’s Understanding of Legal Practice

The FCA, being the regulator for financial services, has limited experience of how law firms operate, the sector-specific risks, and the broader applicable regulatory framework.  In order for the FCA to exercise effective and proportionate supervision over law firms, it must not apply a one-size-fits-all approach

2. Risk of Dual Regulation

Even after the FCA takes over AML supervision, the SRA will still have the power to enforce its Principles, Standards and Regulations (as well as the Solicitors Accounts Rules (SAR)). A breach of AML laws would usually amount to an associated breach of those provisions. Similarly, we have seen the SRA make potentially career-limiting allegations, including lack of integrity, in these types of cases. This could potentially lead to overlapping supervision and increased regulatory burden, if this type of misconduct were to be scrutinised by both the FCA and the SRA.  Take, for example, the situation where a law firm is alleged to have used its client account as a banking facility in breach of SAR 3.3. This is typically accompanied by an allegation that a breach of that rule also offends AML legislation. What we do not yet know, and what will need to be clarified, is whether the FCA or the SRA would be responsible for taking enforcement action – or whether separate action could be taken by both regulators. We question how such a regulatory overlap would work in practice, and how that burden could be considered fair and reasonable.

It also remains to be seen where the Solicitors Disciplinary Tribunal fits into the picture. Could that become a forum for cases investigated by both the FCA and the SRA or would responsibility for enforcement pass to the FCA’s Regulatory Decisions Committee or some new enforcement body/division?

3. FCA’s Capacity and Approach

Under the new regime, the FCA will be responsible for supervising thousands of firms across legal, accounting, and financial services sectors. At this stage, there is no indication as to whether the FCA will adopt the same approach to regulation across all sectors. If the FCA adopts what is anticipated to be a more formal, rules-based approach, it is possible that law firms may face more structured reporting requirements and inspections, with a need for evidence of senior management oversight and an expectation of more robust and auditable records.. Firms may need to update governance structures and will need to ensure clear documentation and oversight is in place.

4. Impact on the SRA’s enhanced financing powers and wider regulatory powers

So far there has been no indication on what impact this will have on the SRA’s enhanced fining powers in relation toeconomic crime and its enhanced duties under the Economic Crime and Corporate Transparency Act 2023 (ECCTA). It is difficult to see how the SRA will be able to fully engage these intended powers when it no longer has oversight over AML issues. This is bound to cause uncertainty, with ECCTA havingonly recently come into force.

Additional Points of Interest

a) Will the MLRO and MLCO roles become FCA Senior Management Functions?

Currently, Money Laundering Reporting Officers (MLROs) and Money Laundering Compliance Officers (MLCOs) are approved and authorised by the SRA. Under the FCA’s regime, these roles would fall within the scope of two Senior Management Functions (SMFs): SMF 16 - Compliance Oversight and SMF17 – MLRO. If that regime is to be extended to individuals performing those roles in law firms, this could mean that they would need, and be subject to, FCA authorisation. In that situation, these individuals would also have to comply with separate FCA rules, including the conduct rules and requirements on fitness and propriety. Again, it is not clear how such dual regulation would work in practice.

b) Will Breaches Be Sanctioned Under FSMA Sections 66 and 56?

Under the Financial Services and Markets Act 2000 (FSMA), Section 66 allows the FCA to impose fines for misconduct, and Section 56 allows the FCA to issue prohibition orders, banning individuals from regulated roles.  If these powers are extended to the FCA’s AML supervision of law firms, it would give rise to additional personal risk for MLROs and senior compliance staff.

Sector Response

The Law Society and SRA have unsurprisingly raised concerns about the loss of sector-specific expertise and the potential for increased costs resulting from this change. As we have identified, across the legal sector there are concerns over the risks of dual regulation and additional personal liability for MLROs and MLCOs. Many in the profession welcome restrictions on the scope of the SRA’s oversight but could it be a case of “be careful what you wish for”?

Next Steps

The Government consultation on the scope of the FCA powers as SPSS is expected in November. Firms are advised to engage in the consultation process and start reviewing their policies and procedures, compliance roles and governance practices now, in preparation for for the supervisory transition.