News focus: AML supervision - HM Treasury ponders new state regulator

First the good news. Under HM Treasury proposals published this week, solicitors may no longer have to live in fear of anti-money laundering inspections by the Solicitors Regulation Authority. Now the bad news: the SRA’s AML responsibilities could be taken over by a new state regulator. ‘It would be important to mitigate the impact of this dual regulation on firms,’ the consultation document observes drily.

A single regulator features in two of four proposals offered in Reform of the Anti-Money Laundering and Counter-Terrorism Financing Supervisory Regime, published for consultation on 30 June. The exercise follows a review of AML supervision which last year found ‘significant weaknesses’. One that appears to be exercising the Treasury is the number of bodies involved: three statutory supervisors and 22 professional body supervisors (PBSs). These PBSs include the SRA, which at last count was responsible for 8,462 regulated entities.

This complexity, and the lack of a single register of supervised firms, make it hard to ‘police the perimeter’ – identifying and taking action against unsupervised firms.

Of course, we already have one oversight body, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), created in 2017 ‘to ensure robust, consistent supervision’ as well as good information-sharing between supervisors and law enforcement.

This office features in the most modest of the four proposals, the OPBAS+ model. This would retain existing statutory supervisors – the Financial Conduct Authority, the Gambling Commission and HMRC plus the 22 PBSs. However OPBAS would be given a ‘general rule-making power’ analogous to that of the FCA. It could also be empowered to publicise details of supervisory interventions and fine bodies for supervisory failings. While this is the least disruptive option, the document notes it has less potential to improve consistency of supervision.

'The primary challenge of this model is the transfer of tens of thousands of firms to a new supervisor'

Reform of the Anti-Money Laundering and Counter-Terrorism Financing Supervisory Regime consultation

Next up in ambition is consolidation of supervising bodies: from 22 to ‘between two and six’ responsible for the legal and accountancy sectors. The proposal for two is based on the idea that the legal supervisor could operate UK-wide. A more realistic proposition is that one supervisor would be required for each of the accountancy and legal sectors in each of the three jurisdictions. (Scottish practitioners may bristle at the assumption that Scottish law is merely the creation of a ‘devolved administration’.)

According to the Treasury, consolidation would confer advantages of access to information from a wider regulated population, and economies of scale. Which of the 22 PBSs would be selected is not stated.

Consolidation would also create the risk that fewer resources would be directed to small or low-risk firms. ‘Dip sampling’ would still be required, the paper states.  ‘The primary challenge of this model is the transfer of tens of thousands of firms to a new supervisor’, it adds, summing up the likely reaction of, say, bar chambers being required to report to the SRA. Meanwhile, the consolidated PBSs would have to ‘increase their capacity commensurate to the new firms joining their population’.

Two of the four Treasury proposals invoke a single AML supervisor. In option three, one organisation would take responsibility for supervising all legal and accountancy sector firms. While this could be an existing body, the document notes that currently ‘there is no specific body that appears to be appropriate’. It suggests it may be more appropriate for a state body, accountable to parliament, to have the AML powers. However, it concedes that adding another agency to the regime ‘could increase information-sharing barriers and regulatory burdens’.

In the final, most ambitious model, a single body would take over AML and counter-terrorism financing supervision in its entirety – across banks and casinos, as well as legal and accountancy. Creation of this single anti-money laundering supervisor – abbreviation ‘SAS’ – would ‘address the lack of consistency in risk-based supervision’. The paper notes lack of expertise in specific sectors would be a concern – as would the disruption involved.

The question of most interest to the professions will be who pays. OPBAS+ would require no changes, but consolidation ‘would have significant funding implications’. Successful operators would receive more, while those ceasing to supervise would lose out. ‘There would be considerable transitional costs,’ the paper warns. OPBAS would also be hit by the decline in the number of bodies paying the current levy. As for the more ambitious options, setting up a new public body would require ‘considerable investment’. Firms would be charged an annual fee based on their business and size.

The point of the exercise is to improve the effectiveness of AML work ‘through consistent and proportionate risk-based supervision’, the Treasury says. Legal regulators – not to mention law firms – can be expected to respond robustly.

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