The consumer protection review: Getting ahead of the curve

Firms with large corporate clients are called upon to handle highly sensitive information and large sums of money, while working across multiple jurisdictions and with multiple parties. This puts lawyers under huge pressure and requires them to undertake tasks typically outside the scope of legal practice. From KYC checks, to AML compliance – this complexity creates risk and mistakes can be hugely detrimental to individual lawyers, and to their firms.

The aim of the CPR is to help the regulator monitor and manage these risks. The report shared earlier this year sets out a few pathways to explore for reform,  including how the regulator’s own approvals process for firms could change. Other potential outcomes could include new rules around the handling of client money.

To tighten up processes around the handling of client funds, the SRA’s review has suggested it could restrict firms from holding client money, meaning alternative approaches would be needed such as with escrow and third-party managed account providers. There could also be targeted controls around client accounts and more controls on certain firms or business models. It’s also possible that the SRA might work with other regulators – such as the FCA – bringing even greater scrutiny of fund handling.

Law firms have held client accounts for the best part of a century. In the face of this increasing scrutiny however there is a growing trend towards using third-party payment services for high value and complex deals.

Then there is the question of complexity. Managing client funds is no longer as simple as keeping client monies separate from office monies. With increasingly complex anti-money laundering and criminal finance requirements, international sanctions, cybersecurity risks and regulatory actions, not to mention dealing with countless stakeholders in jurisdictions around the world, payments processes have become far more complex than they used to be.

All of which means that, whatever the final outcome of the CPR, the controls that a law firm will be expected to put in place to handle money will require new and expensive capabilities and the adoption of third-party payment services will continue to accelerate.

Many law firms lack the in-house expertise to manage risk, or rely on highly inefficient processes, so partnering with tech and finance firms that can deliver security, transparency and speed for fund management will be key. Likewise, when it comes to operating within a financially regulated context, leveraging the expertise of businesses already in that space is a shortcut to compliance, as compared to building those capabilities from scratch.

Partnering with financially regulated businesses could not only help firms stay ahead of the regulator but, crucially, will limit some of the potential for human error that this complexity brings and deliver enhanced services to clients.

In a sector like law, trust is paramount and the reputational damage that follows a security breach or fund mismanagement is far more punitive than financial loss or regulatory sanctions. Law firms need to be trusted partners in some of the biggest decisions made by businesses and consumers alike. When that trust has been breached, it’s an uphill battle to get it back.

It’s crucial that firms take action now to ensure they’re ready for the regulatory changes that might follow the consumer protection review. Technology will be the key to protecting their clients, their reputations and their security.

This article was first published in Law.com - read online here.