The Rise of Fines and Prosecution: Better Handling of Client Money

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.

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 inhouse 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. 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.

Law firms are not regulated to operate their client accounts as a banking facility for clientsPaul Phillip, Chief Executive Officer of the SRA

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?

https://www.lawyer-monthly.com/issues/2018/11/26/