SRA’s Tightened Regulation: Is this the Catalyst for a Shift in the Legal Landscape?
Prepared for: Fintech Herald
The ease with which data travels through the digital landscape has unfortunately, made it easier for corruption and financial crime to take place. Recent research suggests that a staggering 75% of UK law firms have fallen victim to a cyber-attack in the last 12 months, highlighting the acute vulnerability of sensitive client information and finances, This threat to the legal and professional services industry demands firms make a steadfast commitment to robust cybersecurity measures and embed meticulous accounts management practices.
The Solicitors Regulation Authority‘s (SRA) decision to enhance its fining powers, coupled with the Financial Conduct Authority’s (FCA) recent introduction of Consumer Duty, signals an industry-wide tightening of regulatory oversight.
These tightened regulations are prompting law firms to critically evaluate their payment processes. It’s clear that the existing penalties for money laundering, asset concealment, and the misuse of client accounts, are no longer adequate deterrents, leading to legal service regulators raising the bar to address such misconduct taking place in law firms to ensure confidence remains in the legal profession.
The warning signs have been raised. Further crackdown on client money management is imminent, welcoming a period of transformation and heightened accountability for law firms.
Client money management: A relic of the past?
With the base interest rate in the UK rising from 0.1% in 2021 to 5.25% as of August 2023, law firms could earn significant interest by holding large residual balances in their client accounts. The new SRA regulations target law firms to comply with new money management rules. These include robust and evolving Anti-Money Laundering Regulations (AML) and Know-Your-Customer (KYC) rules to avoid falling foul of fines or worse, criminal charges.
Handling client money is a risky business. Traditional tactics are no longer cutting it, and the needs of professionals are shifting. Market uncertainty, complex stakeholder coordination, and rigorous transaction reviews mean handling client funds and facilitating payments only adds to lawyers’ concerns.
Law firms conduct due diligence for many reasons – whether it’s vetting new clients, supporting litigation, or assessing conflict of interest. For over two-fifths of UK law firms (42%), due diligence is one of the most time-intensive aspects of managing client funds and payments. Completion processes must be rigorous to ensure the correct governance and precautions prevent money laundering or cyber risks.
With the new regulations in place, the client experience is at stake. Data shows law professionals at firms with an average deal size of £50-£100m were most likely to say that checks take two-to-three weeks. So, how can firms navigate new money-handling limits by regulators whilst meeting client needs for speed and security?
Every minute counts
If a law firm juggles various clients and legal matters simultaneously, managing them can be challenging. Outsourcing client account functions has become an attractive solution for many law firms. Nearly half (49%) of top law firms in the UK now report that they outsource their client account function to a paying agent or escrow provider who can handle client account functions in response to the SRA and FCA regulatory changes, specifically for firms that handle large-scale Mergers and Acquisitions (M&A). With the risk of fraud at an all-time high, outsourcing client account management allows firms to reduce risk and time-consuming tasks that drain precious resources.
A key component of a deal’s complexity is the international spread of transactional parties. By using a third-party payment provider, combining global access to payment rails and financial capabilities, international fund flows are seamless for legal teams and their clients. Law firms need to understand their clients inside out. Things like governance and supervision, running risk assessments, transaction monitoring, and suspicious activity reporting are all cared for, meaning the burden of chasing and collating is reduced.
Wave goodbye to past payment processes
Law firms are known for their adherence to time-honoured practices. The time has come to discard outdated payment processes that no longer align with the demands of the modern legal sector. The digital revolution has intensified cyber-crime threats and heightened the risk of financial fraud, requiring law firms to rethink their approach to dealing with cybersecurity, due diligence and data management. The SRA has recognised these acute issues impacting security and client safeguarding. The regulator’s revised authority has been a key driver of change, highlighting the importance of robust client account management through monetary reprimands.
To address these intensifying challenges, technology-led payment providers have designed solutions specifically to streamline the complexities of client account functions, providing law firms with the agility and flexibility to navigate the ever-changing legal landscape. Embracing technology promises a transformative shift in the operational structure of legal services; It’s time to welcome in the new and leave the old behind.
