Today the Treasury announced long-awaited plans for a radical overhaul of the UK’s anti-money laundering (AML) supervisory regime which will see the Financial Conduct Authority (FCA) step up as a super-regulator for the professional services.
These welcome reforms will consolidate the supervision of lawyers, accountants and company formation agents for money laundering, bringing them within the FCA’s expanded regulatory remit as an AML regulator. This streamlined supervision holds potential to deliver a step change in accountability for professional enablers, if the FCA’s resourcing is boosted through the reinvestment of money laundering fines back into its supervisory capacity and its staff is enhanced by absorbing existing sector-specific expertise.
A regulatory shake-up of the professional services
Why is reform needed?
Lawyers, accountants and trust and company formation agents need to be proactive gatekeepers who prevent dirty funds from undermining the UK’s financial integrity. Yet while these professionals frequently engage in high-risk areas of work, they are currently subject to weak supervision and light-touch enforcement when they breach anti-money laundering legislation.
The current AML supervisory regime is fragmented and weak, with responsibility for AML supervision spread across 25 different supervisory authorities including nine legal sector supervisors and 13 accountancy sector supervisors. Our Broken Record report published earlier this year found uneven and inconsistent supervision across the legal sector, with persisting high levels of non-compliance and a reluctance to use the full range of sanctions.
For seven years, the Office of Professional Body AML Supervision (OPBAS) has urged these supervisors of lawyers and accountants to pull their socks up, but progress has been patchy at best. The verdict delivered by OPBAS in September 2024 was that it is “still not seeing the consistent, effective improvement we need”, with poorly performing supervisors “hampering efforts to make a real dent in the flow of illicit funds in the UK”.
It’s long been clear that radical reform is needed to achieve a step change in the effectiveness of AML supervision, particularly as the UK prepares for its upcoming visit from the Financial Action Task Force (FATF) in 2027.
The FCA’s enlarged remit
Following a major consultation in 2023 on four potential models for reforming the UK’s fragmented and uneven AML supervisory regime, the Treasury has today announced sweeping reforms to consolidate supervision of the professional services.
Rather than setting up a new statutory regulator, the government has opted to enlarge the FCA’s remit as an existing regulator of roughly 17,000 financial services firms to oversight of approximately 60,000 firms across the financial and professional services sectors. This means it will take over AML supervision from the 22 professional bodies that supervise lawyers and accountants, as well as company formation agents and accountancy service providers currently supervised by HMRC.
While the FCA is far from perfect, it has clear strengths to build on as it assumes the role of super-regulator, including its strong experience and expertise in pursuing a data-driven approach to risk-based supervision, and its willingness to take enforcement action against large firms and deter non-compliance with credible fines.
This will certainly shake up the legal and accountancy sectors which have long escaped effective supervision and robust enforcement for their compliance with anti-money laundering rules.
Setting up a super-regulator for success
Getting the new FCA up and running as the new professional services supervisor will take time and effort, and lots of questions about its powers and functions remain unanswered. A consultation due to be published in early November will address the powers and accountability mechanisms for the FCA in its new role, after which the government will need to carve out parliamentary time on an urgent basis in order to pass legislation giving effect to these changes.
Making this major change to AML supervision a success depends on a number of factors.
Resourcing
First, the FCA’s new functions will need to be sustainably resourced, with the government providing proper funding for the transitional period, and allowing the FCA to levy reasonable fees on regulated firms so that it can sustainably fund its supervisory activities.
In addition, any fines the FCA imposes when firms break the money laundering rules should be reinvested through an Economic Crime Fighting Fund that could boost resources for AML supervision and the wider economic crime enforcement landscape.
Staffing
A key risk for the FCA’s new role is that specialist sectoral and regional expertise that has been developed at Professional Body Supervisors is lost in the transition. The FCA, government and other AML supervisors will need to work together closely to ensure that this key expertise is transferred to and deepened at the FCA.
Powers, independence and accountability
The FCA is an independent financial regulator, accountable to both the Treasury and Parliament, and this must apply to its new capacity as a super AML regulator. To raise standards of supervision across the professional services, the FCA must be able to use the full range of equivalent powers – including criminal prosecution – that it currently wields in its supervision of the financial sector.
The FCA will also need to be empowered to receive and share information and intelligence with law enforcement and other regulators (including the current supervisors for the legal and accountancy sectors) to inform its risk based approach and gather and share evidence to assist wider investigations into money laundering. Clear information-sharing processes and strong collaboration will be especially important as legal sector supervisors remain responsible for promoting the prevention and detection of economic crime – despite losing direct AML supervisory responsibilities.
At the same time, the FCA will need to have high levels of transparency in its operations and enforcement in order to maintain the confidence of parliament and the wider public. In particular, it will need to adopt high standards of public reporting on its AML supervision either by publishing standalone annual reports or integrating AML supervision data into its annual enforcement reports.
Getting its priorities right
Finally, it is worth emphasising that the FCA’s prioritisation of resources on the “highest-risk accountancy, legal, trust and company service providers” should not come at the expense of allowing lower level but widespread non-compliance to go undetected and unsanctioned. Low level non-compliance could be exacerbated by issues, identified by the International Monetary Fund, that the FCA was failing to conduct enough supervisor visits to ensure that its supervision was “commensurate” with the risks in its supervised population.
Meanwhile, the FCA will be taking on this new responsibility in the context that it is also being urged to adopt growth as a priority. Another key document published by the Treasury today on a “new approach to ensure regulators and regulation support growth”, holds up AML supervision as a key deliverable in the government’s aim to simplify regulation. The same document highlights the government’s commitments to:
- “radically streamline” and cut the overall burden by 50% of the Senior Managers and Certification Regime, a key but woefully underused way to hold senior executives to account when economic crimes happen on their watch that has never been used in relation to money laundering;
- make the Money Laundering Regulations “more effective and proportionate to risk”; and
- launch a “Regulator Dashboard” that among other things will make it “easier for businesses and stakeholders to monitor regulator performance”.
The FCA is essentially being pressured to cut red tape in line with the government’s narrative on deregulation and to meet its secondary objective to facilitate “international competitiveness and growth.” But restricting the flow of dirty money into the UK economy is critical to ensuring sustainable economic growth and that requires robust and independent AML supervision and economic crime enforcement.
What next? Mitigating the transition risks
While the government’s bold decision to consolidate AML supervision for lawyers, accountants and company formation agents is undoubtedly welcome, it will need to be alive to the risks inherent in a transition to more consolidated supervision.
OPBAS, which is currently housed in the FCA, will be crucial to managing this transition. In particular, important questions include what will happen to active investigations by the current supervisors, and whether they will finish these or hand them over to the FCA; and how specialist knowledge will be transferred from these sectoral supervisors to the FCA.
For far too long, UK professional enablers of grand corruption and kleptocracy have escaped scrutiny thanks to light-touch AML supervision, leaving the UK exposed to dirty money. The reforms announced today hold much promise but there is lots of work to do to ensure they are implemented effectively and achieve the step change that is so sorely needed.
