The Government’s planned overhaul of the UK’s anti-money laundering (AML) supervisory regime is set to bring a major change to the way law firms’ AML compliance will be overseen. Under the proposals, the Financial Conduct Authority (FCA) will assume responsibility for AML supervision of legal service providers, replacing the current system under which firms are supervised by professional bodies such as the Solicitors Regulation Authority (SRA) and the Council for Licensed Conveyancers. The FCA has indicated that a phased transition is expected to begin in late 2028.
While the SRA will continue to regulate solicitors and law firms more broadly, AML compliance will sit within a new supervisory framework intended to deliver greater consistency across professional services and strengthen the UK’s response to financial crime.
Why Is the AML regime changing?
The reforms are intended to replace the current fragmented system of AML supervision with a single supervisory body for legal, accountancy, trust, and company service providers. The FCA says this will improve consistency and strengthen the UK’s response to money laundering and terrorist financing. Firms should also expect a more data-driven and interventionist style of supervision.
A different style of supervision
Although the FCA has emphasised that supervision should be proportionate and risk-based, law firms should anticipate a regulator that is accustomed to detailed information gathering, thematic reviews, and proactive intervention.
The FCA’s regulatory toolkit includes powers that professional regulators have not traditionally used to the same extent. These include extensive information-gathering powers and the ability to require independent reviews by external specialists, often referred to as “skilled person” reviews, at the firm’s expense.
Firms should therefore expect greater scrutiny of whether AML controls are genuinely effective in practice rather than simply documented on paper.
Questions around dual regulation
One issue that remains unresolved is how the boundary between AML supervision and wider professional regulation will operate in practice.
The SRA will continue to oversee conduct, professional standards, and compliance with the SRA Accounts Rules. However, some areas inevitably overlap with AML risk. Situations involving client account misuse, the provision of banking facilities, or deficiencies in financial controls could potentially engage both regulatory regimes.
While the Government has indicated that appropriate arrangements will be put in place, guidance on how these overlapping responsibilities will be managed is still awaited.
Authorisation and governance may come under greater scrutiny
Although the detailed authorisation process has not yet been published, firms are likely to face a more structured registration and approval regime than they currently experience.
Early indications suggest that regulators will want detailed information about a firm’s ownership structure, governance arrangements, client base, risk profile, and financial crime controls. Particular attention is likely to focus on beneficial owners, officers, and managers, together with the systems used to manage AML risk.
Firms should expect scrutiny of governance, fitness, and propriety, and the ability of senior individuals to oversee AML risks effectively.
Documentation will matter more than ever
While the FCA has yet to publish detailed requirements, firms should expect their AML governance and documentation to come under close examination. These include:
- Practice-wide risk assessments (PWRAs)
- AML policies, controls, and procedures
- Compliance monitoring and record management policies
- Client due diligence processes
- Training records
- Governance and reporting structures
In many firms, these documents already exist. The challenge will be demonstrating that they are up to date, tailored to the firm’s actual risk profile, and actively embedded within day-to-day operations.
Version control, periodic review, and evidence of implementation may become just as important as the documents themselves.
Previous AML breaches could attract attention
Firms that have previously faced AML findings or penalties should expect scrutiny of the steps taken to address historic weaknesses. Demonstrating improved systems, controls and ongoing compliance may be important under the new regime.
Understanding which work falls within scope
A key challenge for many firms will be identifying which matters fall within the regulated sector. While some work is clearly in scope, AML obligations can also arise in matters that would not ordinarily be treated as regulated where tax advice or certain other services form part of the retainer. Effective matter classification, appropriate file-opening procedures and ongoing monitoring can help firms demonstrate compliance and avoid unnecessary regulatory risk.
What law firms should do now
Although the FCA is not expected to begin supervising firms until late 2028, waiting for final rules would be a mistake.
Law firms should use the time available to assess whether their AML framework would withstand more intensive regulatory scrutiny.
Practical steps include:
- Reviewing and updating the PWRA
- Refreshing AML policies, controls, and procedures
- Testing whether controls are operating effectively in practice
- Reviewing governance arrangements and management oversight of AML risks
- Maintaining tailored AML training records
- Considering an independent AML audit or gap analysis
- Ensuring matters involving tax advice or other regulated activities are correctly identified
Firms should also begin considering what information they could be asked to provide during an authorisation or onboarding process and whether it is currently available in a clear, accessible format.
While the reforms are not expected to take effect until 2028, firms have a clear indication of the standards and scrutiny they are likely to face: greater scrutiny of governance, risk assessment, record-keeping, and the practical effectiveness of their AML controls. Those that take the opportunity now to review their frameworks, address weaknesses, and improve the quality of their compliance evidence are likely to be better placed when FCA supervision begins and more confident in demonstrating that their systems are fit for purpose.
If you would like to discuss how the move to FCA supervision could affect your firm’s AML framework, governance arrangements, or risk management processes, please contact Frank Maher.
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