AML: A tale of two regulators

The biggest change in anti-money laundering (AML) supervision since the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 came into force – or perhaps ever – is underway. The announcement that the Solicitors Regulation Authority (SRA), along with 21 other legal and accountancy supervisors, will no longer be responsible for AML supervision seems to have come completely out of the blue. 

Background

This issue has been bubbling away under the surface since 2018, when the Financial Action Task Force, the global AML standard-setting body, identified several issues with the UK’s supervision of lawyers and accountants. HM Treasury subsequently conducted a review of AML supervision and consulted on possible changes in 2023. That consultation set out four possible future models for AML supervision and closed in 2023. 

Nothing more was said until October 2025, when the government announced that it was opting to consolidate AML supervision of lawyers and accountants – not into one of the existing professional body supervisors, nor into a new body as consulted upon, but into the Financial Conduct Authority (FCA).

Too many cooks?

The Treasury is considering whether future AML supervision should prioritise specialism by profession or greater consistency across sectors. At present, there are 25 different AML supervisors, of which 22 are professional body supervisors overseeing lawyers and accountants.

This large number of supervisors gives rise to different expectations and varying standards, as each professional body supervisor has its own unique enforcement powers and disciplinary process. These inconsistencies mean that some streamlining seems logical; however, there is a lot of specialist knowledge within each of those supervisors.

Legal services regulators span different nations and very different areas of practice. The money laundering risks faced by a barrister in England will be quite different from those of a solicitor in Northern Ireland. As such, the move to a single supervisor within financial services supervision poses some challenges.

Transition period

In the short to medium term, moving AML supervision will create turmoil that firms will have to navigate. It needs to be made clear how the SRA and other supervisors will wind down AML supervision, potentially with reducing resources if staff leave for new roles.

There is also uncertainty around what will happen to the SRA’s open AML investigations at the point of transition, and whether these will be moved to the FCA or will stay with the SRA for completion.

At the same time as professional body supervision will be winding down, the FCA will need to be gearing up to supervise lawyers, accountants, and trust and company service providers for the first time, both in terms of resources and knowledge. These are all specialist services with very different risk profiles from the financial services firms the FCA currently supervises.

I hope, and expect, that the FCA will recruit specialist teams and retain some of the existing expertise in professional body supervisors to ensure they understand the risks and issues, and supervise accordingly.

Longer term, there are also fundamental differences in the remit of the SRA and the FCA. Legal services regulators have several regulatory objectives set out in the Legal Services Act 2007, which impose a broader responsibility for them to cultivate an effective legal system and promote the rule of law.

A key regulatory objective is to promote access to justice, which includes ensuring consumers’ legal needs are met. The FCA has a subtly different objective to promote competition in the interests of consumers. Hopefully, it will supervise in a way that is appropriate for all types of firms, because AML supervision has the potential to be particularly burdensome for small firms.

What will supervision look like?

The SRA will most likely retain its regulatory objective to promote the prevention and detection of economic crime, as set out in the Economic Crime and Corporate Transparency Act 2023; however, this raises several questions.

This regulatory objective implies that the SRA will hold on to some responsibility for preventing crime, such as sanctions evasion and fraud, despite losing the specific responsibility for AML supervision. Given the strong similarities in processes and controls to prevent money laundering and wider economic crime, there is the potential for significant overlap and duplication between the FCA and SRA in looking at these issues.

In the longer term, firms will need to negotiate having two separate supervisors. Additional fit and proper checks, as well as dual fees, could increase the burden on firms, while lawyers will have to manage ongoing data requests from both the FCA and SRA.

There is also a fundamental question about how investigations will work in the future. Many AML investigations include wider conduct issues, such as accounts rules breaches or questions around supervision and training. Where investigations span both AML and conduct issues, there will need to be co-operation between the SRA and the FCA as to how these should proceed. Ideally, there should be a lead body for investigations; otherwise, there is a risk of double enforcement for the same issue.

In addition, there is uncertainty over whether the FCA will have equivalent powers to the SRA to request privileged information as part of its investigations. Under the current consultation, this looks unlikely, which could weaken its effectiveness in investigating money laundering-related allegations.

Specialist guidance

There will be a change in guidance that firms will need to navigate in due course. The government has stated that organisations that are compliant under their current AML regime should be compliant under FCA supervision; however, firms are meeting the standards set out in sector-specific guidance, which is likely to change.

This guidance will be taken on by the FCA and brought in line with financial services and other sector guidance, so there will inevitably be alterations.

A point of concern is the possibility that the new guidance could be drafted, refined and amended by non-legal service specialists. The legal sector affinity group, which is currently responsible for the legal AML guidance, is a broad organisation that includes regulators and representative bodies for all types of lawyers across the UK.

The current approach to drafting and updating guidance considers the specialist nature of lawyers’ work, including issues surrounding professional privilege. The FCA would benefit from seeking involvement from specialists to draft and review the guidance in the future to ensure it retains some of the essential legal-specific principles.

Advantages to firms

There may be some advantages for firms, however. Interestingly, when looking at the cost per firm of AML supervision, the FCA comes in lower than the SRA, according to supervisors’ 2023/24 annual returns to Treasury. These reports show that the FCA spent £349 per firm for AML supervision compared to £528 by the SRA. Assuming costs don’t change and the SRA reduces the practising certificate accordingly, this could mean a decrease in the direct cost of AML supervision.

Conclusion

In summary, it is understandable that the government has sought to reduce inconsistencies in AML supervision. However, in removing professional body supervision for legal services entirely, and moving supervision to a financial services regulator, it has put the specialist knowledge of the sector at risk of being lost. The change could also lead to an AML regime that is duplicative and doesn’t consider the particular risks and issues of legal services.

There is still a window to respond to the consultation to help shape the FCA’s supervision regime and the transitional arrangements. I would urge everyone who has an interest in AML supervision to submit a response to ensure that the new regime works to the benefit, not the detriment, of law firms.