Client funds safeguarding is paramount to law firms. As technology advances and information continues to flow in digital spaces, it is becoming increasingly challenging to identify and prevent financial crime activity. Recent research shows that 75% of UK law firms have experienced a cyber attack in the last 12 months, with more than three-quarters of these related to client accounts. As such, law firms are more concerned than ever about their security and risk profiles.
There have been industry-wide calls to introduce meticulous protocols to handling sensitive client data and a move to managing finances with secure digital solutions. A key driver of this has been the introduction of the Solicitors Regulation Authority’s (SRA) strengthened fining powers, as well as supporting movements from industry regulators such as the Financial Conduct Authority’s (FCA) new Consumer Duty regime. Regulatory belts are tightening, prompting law firms to reevaluate their operational structures as a whole, with a strong focus on their payment processes and ways of managing client monies.
As the risk landscape for the industry continues to become more precarious, the SRA’s existing penalties for breaching their Accounts Rules – whether it’s money laundering, improperly hiding assets, or using client accounts as banking facilities – are no longer enough. The power of legal service regulators has been ramped up to address pain points and build public trust in firms. As such, a necessary crackdown on client money management is underway, signalling that change is on the horizon.
Client money management: A dying practice
As of August 2023, the UK’s base interest rate has soared from 0.1% in 2021 to a staggering 5.25%. This substantial increase has opened up new opportunities for law firms to earn significant interest by holding large residual balances in their client accounts. However, the financial landscape shift is closely accompanied by the watchful eye of the SRA, which has warned firms that they must pay a ‘fair’ sum of interest back to customers or face being investigated.
The SRA’s revised regulations encompass a dynamic framework of Anti-Money Laundering Regulations (AML) and Know-Your-Customer (KYC) rules. These aim to guide law firms to protect their clients and prevent financial crime, and are enforced by the authority to penalise firms with substantial fines or even more severe consequences, such as criminal charges. While these rules have been in place for several years, the latest AML annual report from the SRA has made it clear that law firms aren’t yet fully au fait with the requirements. Only 30% of law firms are fully compliant, with a further 51% only partially compliant. There is a growing knowledge gap in the legal industry when it comes to financial crime as increasingly complex criminal activity continues to take place – especially with the aid of technologies such as AI.
Due diligence, however, is a very standard procedure for a law firm, whether at the point of on-boarding a client or at the very end of a deal for verifying transactional parties. With this being such a mainstay of a law firm’s BAU activity, it is concerning that over two-fifths of UK law firms (42%), reported that 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, however legal teams should be applying themselves to delivering legal work rather than completing administrative paperwork.
With the new regulations now set, a crucial question comes to mind – how can law firms navigate the evolving boundaries set by regulators whilst meeting the pressing needs of clients who seek both swiftness and security in their legal dealings?
Time is money
Partnering with a payment provider has become an attractive solution for many law firms to help ease the burden of completing complex transactions and making deal payments, Nearly half (49%) of top law firms in the UK now report that they engage a paying agent/escrow provider (25%), or banking partner (24%) to manage client payments.
While facilitating payments via a paying agent or holding funds in escrows have been long-standing options for legal teams to handle deal payments, they are now becoming even more common for UK-based law firms in light of the SRA regulatory updates. Departments such as M&A, real estate, litigation and supply chain have been the first to see real benefit, but there are far reaching applications across the legal sphere.
A key component of these transactions that builds complexity in the deal flow is the international spread of transactional parties. Not only do these global deals require enhanced due diligence, but they also need FX. By partnering with third-party payment providers, legal teams gain access to global payment networks and financial expertise, streamlining international fund flows for both them and their clients.
With the risk landscape only becoming increasingly fraught, law firms need to update their payments processes and outsource their client money management. The shift not only reduces the administrative burden of tasks like governance and supervision, risk assessments, transaction monitoring, and suspicious activity reporting, allowing legal teams to reduce risk and time-consuming tasks that drain precious resources.
Adapting to the modern era
Within the legal sector, tradition and legacy practices have long been the hallmark of the industry. However, as technology evolves and client expectations grow in complexity, law firms find themselves at a crossroads. To thrive and remain competitive, they must pivot towards operational efficiency and resource optimisation, or risk being left behind.
In this shifting landscape, time is both a precious commodity and a financial asset, and how law firms manage both is undergoing a transformation. The spotlight is now firmly fixed on legal professionals due to regulatory changes. It has never been clearer that the conventional approaches of the past no longer suffice for managing client accounts. The digital age has brought a surge in cybersecurity threats, the spectre of fraud and increasingly complex deal fund flows, compelling law firms to re-evaluate how they can streamline the time-intensive processes while continuing to meet the demands of their clients.
As a result, law firms are increasingly turning to third-party payment providers to simplify the complexity of client money management. Technology offers the promise of a noteworthy shift in the operational structure of legal services. It’s a call for law firms to bid farewell to the old ways and embrace the new.
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Andrew Hawkins, CEO, UK & Europe at Shieldpay
Andrew Hawkins is the Chief Executive Officer of UK and Europe for Shieldpay, the B2B payments partner for legal services. In his role, Hawkins is leading the scaling strategy for the company within the UK and Europe with a strong focus on technology-led innovation. Hawkins joined Shieldpay as CTPO and has over 25 years of technology experience in the financial services and technology arenas, including seven years at Microsoft before holding senior leadership positions at HSBC and the unicorn challenger bank Zopa.
