Ed Boal, Head of Legal, shares a summary of the key discussion points from our recent Risk and Compliance roundtable in London with ten senior level risk and compliance professionals from law firms.
12th March 2024
Shieldpay gathered senior risk and compliance professionals from leading law firms at a roundtable to hold a wide-ranging discussion around the SRA’s recently launched consumer protection review that covered the increasing risks, skills shortages, developing a compliant culture and issues around client money management.
Key themes covered:
1. The challenge of regulatory negligence and culture change
2. Financial crime talent: A skills shortage and need to boost leadership responsibility
3. Imbalance between rate of change and resource available at the regulator
4. Growing aversion to handling client money
The challenge of regulatory negligence and culture change
During the conversation, some concerns were raised around regulatory misconduct.
Despite the significant development of regulatory standards in recent years, akin to the trajectory of banking regulation, some practitioners haven’t taken a proactive approach to continued learning and staying abreast of the changes. The group all shared that they have experienced the most pronounced aversion to change with tenured lawyers who over their years of experience have formed rigid habits which are hard to change, even though the consequences are becoming more severe.
The fast-evolving regulatory landscape underscores the necessity for continual education and leadership in compliance efforts. There must be greater buy-in and engagement from senior lawyers to support risk and compliance leaders to raise compliance standards in the firm and mitigate emerging risks. We intend to go deeper into this point at another session with this group to share best practice around how to navigate this shared challenge of culture transformation.
Financial crime talent: A skills shortage and need to boost leadership responsibility
The persistent challenge of recruiting skilled financial crime professionals in the legal industry was a key theme. The demand for expert individuals well-versed in sanctions and risk management now exceeds the available talent pool, with any lawyers taking on this internal role feeling the pressure of making time for fee earning and client work taking priority. Consequently, financial crime professionals frequently find themselves multitasking, even within larger firms, which can compromise compliance effectiveness.
Establishing a robust risk-aware culture hinges on continuous education and increasing awareness of the importance of compliance. One suggested approach to overcoming this challenge is ensuring that a firm’s MLRO/COLPs possess the absolute authority to decline business opportunities, of course accompanied by clear and communicated rationale. By authorising these individuals to make these decisions, firms can not only enhance the credibility of risk management functions but also foster greater respect for these positions of responsibility within the organisation.
Furthermore, firms need to be more conscientious of the demands of this responsibility, particularly when fee earners are taking this on in addition to generating revenue. There must be adequate investment to give these professionals the necessary resources and team support.
3. Imbalance between rate of change and resource available at the regulator
There is growing concern about the rapid pace at which the SRA is implementing regulatory changes, with fears that it is outpacing its resource allocation. This is particularly consequential as it has been felt to not be able to fully articulate the implications of these changes leading to confusion and at times frustration within the industry. This situation leaves room for differing interpretations and potential misunderstandings, making it challenging to provide straightforward answers and clear direction.
4. Growing aversion to handling client money
The handling of client money was a core focus of the discussion. While there's a historical reliance on client accounts, recent trends indicate a shift away from the use of client accounts for transactional payments due to associated risks and time burden.
This was particularly recognised for transactions that use complex structures. One particular example shared was identifying Ultimate Beneficial Owners (UBO). Not only is this very time consuming, it’s also costly and presents real risk that can be challenging to mitigate or eliminate.
The other key challenge raised was managing residual funds, described as “painful” for treasury teams.
Setting up and managing escrow facilities was also raised as being impacted by these challenges. They are seen as tiresome and complicated to set up and require significant due diligence checks which law firms do not want to undertake. For this reason, it is common practice that law firms do not offer escrow through their client accounts, but rather look to engage with a payments provider to manage these funds.
The consensus in the room was that client accounts now serve a particular, limited function. They are fit for purpose for smaller, more straightforward transactions such as fees on account and deals where there are only a couple of payers and payees or where funds are being received from reputable law firm counterparts. However, retaining control was seen as a key benefit of using a client account, giving legal teams greater flexibility for any last-minute changes to the transaction and the ability to communicate directly with the client on payment.
In response to the increasing risks outlined in the discussion, the group concluded that using a regulated third-party payments services is the favoured option for more complex transactions. For high value deals, large volumes of payments or sending funds to international payees (with FX), there is a growing movement away from managing the payments in-house through a client account, with its potential risks for compliance and ultimately reputation, and towards working with a designated payments partner.
------------------------
Want to stay ahead of the curve and join your peers for future round table discussions?
Please register your interest here
COMMENTS