What the FCA's new AML role means for law firms and why it's time to rethink client money

In October 2025, HM Treasury confirmed a major change to the UK’s anti-money laundering (AML) supervision regime: the Financial Conduct Authority (FCA) will take over AML supervision for law firms, replacing the 22 professional body supervisors (PBSs) currently responsible for oversight. 

This announcement has raised important questions for legal professionals. What does this mean for compliance? How will it affect day-to-day operations? And what steps should firms take now to prepare? 

While the full details are still emerging, one thing is clear: compliance is about to become more complex and more time-consuming. For firms already managing the operational challenges of client money, this is a moment to explore smarter, more resilient approaches. 

What is AML and why does it matter? 

AML refers to the systems, controls and processes designed to prevent money laundering and terrorist financing. For law firms, this means ensuring that client funds are not used for illicit purposes, and that firms can demonstrate robust checks on source of funds, client identity and transaction legitimacy. 

The Money Laundering Regulations already require firms to carry out customer due diligence, monitor transactions and report suspicious activity. With the FCA taking over supervision, these requirements are likely to become more stringent and more closely enforced. 

What is changing and what we do not know yet 

The FCA will become the AML supervisor for legal services, accountancy firms and trust and company service providers (TCSPs). PBSs such as the SRA and the Bar Standards Board (BSB) will retain oversight of professional conduct, but AML compliance will now fall under the FCA’s remit. 

This change is expected to bring: 

• More rigorous risk assessments and customer due diligence (CDD) 

• Increased scrutiny and reporting obligations 

• Stronger enforcement powers, including larger fines for breaches 

However, there is still a lot we do not know: 

• Timing: Implementation depends on legislation and parliamentary scheduling 

• Costs: The FCA’s fee structure is yet to be confirmed 

• Process: How dual regulation will work in practice remains unclear 

• Impact: Firms do not yet know what changes they will need to make to remain compliant 

For many legal professionals, this creates uncertainty and understandably, concern. 

What this means for law firms 

Although the details are still emerging, the implications for law firms are significant. The FCA is known for its data-driven, risk-based approach and its expectation of detailed evidence of compliance. This could mean: 

• More time spent on compliance checks and documentation 

• Increased complexity in managing client onboarding and ongoing monitoring 

• Greater pressure on fee earners who may need to divert time from billable work to compliance tasks 

• Higher costs for technology, training and specialist compliance staff 

For firms that rely on manual processes or legacy systems, these changes could be disruptive. Compliance will no longer be a box-ticking exercise. Firms will need to demonstrate control effectiveness, maintain audit trails, and respond quickly to regulatory queries. This is likely to increase operational overhead and create tension between delivering legal services and meeting compliance obligations. 

The client money challenge backed by Shieldpay research 

Shieldpay’s June 2025 research reveals a profession that is both aware of the risks and cautious about reform: 

• 89% of lawyers say losing control of client money would impair their effectiveness 

• Yet 67% believe the risk of holding client money has increased 

• The market is split: 51% say firms should hold client money, 49% say they should not 

• 53% cite cultural resistance as the biggest blocker to change 

• 43% say they lack awareness of alternative models 

This tension between the desire to maintain control and the growing awareness of risk is at the heart of the challenge. Legal professionals want to protect their clients and their reputation, but they also need practical solutions that do not compromise service delivery. 

Encouragingly, 82% of lawyers believe there is room to modernise how client money is handled, and many see TPMAs as a credible solution. 

A hybrid model balancing control and compliance 

For firms concerned about losing control, a hybrid model offers a practical middle ground. It allows firms to retain their existing client account processes where appropriate, while using a third-party managed account (TPMA) for higher-risk, complex or sensitive transactions. 

What does a hybrid model look like in practice? 

• Large or multi-party settlements 

• Litigation claims and class actions 

• Escrow-style transactions or funds held for extended periods 

• Situations where transparency, auditability and fraud prevention are critical 

• Routine, low-risk transactions 

• Short-term holding of funds 

• Cases where internal processes are already robust and compliant 

This approach allows firms to reduce exposure to financial crime, streamline reconciliation, and meet evolving compliance expectations without giving up control entirely. 

Shieldpay’s platform supports this hybrid model, offering flexibility, security and compliance in equal measure. 

What firms can do now 

While the regulatory picture is still evolving, firms can take proactive steps: 

• Stay informed by monitoring the FCA consultation and legislative updates 

• Review current client money processes and identify pain points 

• Explore alternative models that reduce risk and support compliance 

• Download Shieldpay’s white paper Beyond the client account for deeper insight into smarter legal payments 

Conclusion 

AML reform is a moment of disruption but also a chance to lead. Law firms that act early can reduce risk, improve efficiency and stay ahead of compliance changes. 

Shieldpay is here to support firms through the transition with insight, expertise and practical solutions. If you would like to speak to one of our advisors contact us here.