FCA to become sole AML supervisor for professional services firms

The Financial Conduct Authority (FCA) is set to become the sole anti-money laundering (AML) and counter-terrorist finance (CTF) supervisor for professional services firms. This change will affect businesses currently supervised by a professional body supervisor (PBS), such as those in the legal and accountancy sectors, and some businesses currently supervised by HMRC, such as trust and company service providers.

The decision follows a 2023 HM Treasury consultation which considered four potential reform models for AML / CTF supervision. It has now decided to adopt the model of the FCA acting as Single Professional Services Supervisor (SPSS).

In this article, we recap which firms are currently supervised by which what regulator, which firms will switch to being supervised by the FCA, key expectations on firms, what models HM Treasury decided not to pursue, and a timeline of the proposed changes to the Money Laundering Regulations 2017 (MLRs).

What is changing?

The UK's AML / CTF supervision framework features three statutory supervisors – the FCA, HMRC and Gambling Commission – and 22 PBSs (private bodies who provide supervision for legal and accountancy firms). The UK's first National Risk Assessment in 2015 identified weaknesses in professional body supervision, and a 2022 HM Treasury review of the regime noted continued improvement, but that there were significant weaknesses remaining that warranted reform.

Currently, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), which is a unit within the FCA, oversees several legal and accountancy sector PBSs, including the law societies, bar councils, accountancy, taxation and bookkeeping institutes, and the Insolvency Practitioners Association and Council for Licensed Conveyancers. HMRC also acts as the default supervisor for a number of accountancy service providers who are not members of any OPBAS supervised PBS, and trust and company service providers who are not supervised by PSBs. All of these firm types will – once Parliament passes the necessary legislation to implement the SPSS model – come within the FCA's supervisory remit for AML / CTF purposes.

Firms currently supervised by the FCA (that is all FSMA-authorised firms within MLR scope, all other lenders and crypto-firms) will remain supervised by it. All other non-professional services firms currently supervised for AML / CTF purposes by HMRC will remain so, including estate and letting agency businesses, art market participants and high value dealers. There will also be no change for firms currently supervised by the Gambling Commission.

While the current PBSs will no longer be responsible for AML / CTF supervision, they will continue supervising firms for other purposes.

The FCA's role will be independent of HM Treasury, and the aim is to simplify the regulatory landscape by aligning professional services supervision with that of other sectors already overseen by public sector bodies. The FCA's existing expertise in supervising financial institutions under the MLRs is hoped to aid the transition and ensure the effectiveness of the regime going forwards.

Obligations under the MLRs

The reforms do not change firms' existing obligations under the MLRs: firms that are in compliance should not have to make changes to their existing control framework purely due to a change in their supervisor.

As a reminder, key expectations under the MLRs include:

• Carrying out tailored business-wide and customer risk assessments;
• Applying appropriate customer due diligence and transaction monitoring measures.
• Maintaining adequate internal systems and controls, including:
  • Appointing a "nominated officer" and ensuring employees know how to report suspicious activity to them;
  • Identifying senior manager responsibilities and ensuring senior management is aware of ML risks;
  • Training relevant employees on AML risks and responsibilities;
  • Documenting and updating AML policies and procedures; and
  • Implementing measures to manage AML risk.
• Keeping a record of all customer due diligence measures carried out, including customer identification documents, risk assessments, policies and procedures and training records.

What other models were considered?

In addition to the SPSS model, HM Treasury considered three other potential supervision frameworks:

OPBAS+: giving increased powers to OPBAS

HM Treasury considered giving OPBAS a range of enhanced powers in order to increase the effectiveness of supervision by the PBSs. Overall, respondents did not consider this model sufficient to resolve the fragmentation, inconsistency and coordination problems identified with the current regime.

PBS consolidation

HM Treasury considered reducing the number of PBSs with AML / CTF supervision responsibility from 22 to a far smaller number. In particular, the proposals suggested having either two supervisors with UK-wide remits – one for the accountancy sector, one for the legal sector – or six supervisors – one of each sector supervisor for each UK-jurisdiction.

Overall, respondents identified high feasibility and transition risks, concerns that sectoral expertise would be threatened, unnecessary complexity around enforcement powers and ineffective co-ordination, such that the model ultimately did not align with the Government's objective of simplification.

Single AML supervision (SAS)

HM Treasury also proposed having one public body hold responsibility for all AML / CTF supervision, with the FCA, Gambling Commission and PBSs only continuing to supervise relevant firms for other non-AML / CTF purposes.

Stakeholders again raised concerns around feasibility and sectoral expertise, but also noted that there could be increased regulatory burdens for firms, with HM Treasury concluded that the model's potential issues outweighed any potential system-wide benefits.

Also, the original proposal for the SPSS suggested that it might cover not only the legal, accountancy and trust and company service sectors, but also potentially others, specifically estate and letting agents. The decision on who to include appears to have been taken on the basis of practicalities of implementation.

When will the changes happen?

HM Treasury has published a separate consultation on the powers that the FCA should have as the new SPSS. In parallel, the FCA will develop a detailed delivery plan for its new role, in collaboration with HM Treasury, PBSs and firms.

HM Treasury's proposals mainly merely extend the relevant MLR provisions to the FCA, but Treasury is consulting on:

• Powers for the FCA to register (or refuse to register) firms, conduct checks on them and take action to suspend or cancel registrations, including a consistent approach to a "fit and proper" test for relevant individuals;
• Powers for the FCA to list all firms it supervises to make the perimeter more transparent and easier to policy – at the moment the MLRs contain an inconsistent approach, with registers required for some businesses and optional for others, while lawyers are outside the scope of either mandatory or voluntary listing;
• Allowing the FCA to apply a consistent approach to each supervised sector, and make requests for information and conduct inspection visits – the proposals include allowing the FCA to issue directions to firms and require skilled persons reports (as it can for its regulated community in general);
• Giving the FCA all necessary powers to take civil actions and initiate criminal proceedings for breach of MLRs in line with existing powers;
• Providing firms with up to date information and guidance on AML / CTF risks and how to comply with the MLRs, but giving HM Treasury the right to intervene without obliging it to review and approve FCA guidance; and

The FCA being able to charge fees.

HM Treasury does not propose that firms already supervised should need to re-register, so there should be a grandfathering process, with the FCA then able to ask firms to confirm details or undertake checks. It may also be appropriate for the FCA to take forward any live supervisory actions.

The consultation closes on 24 December and the timeline for passing the primary legislation required to implement the SPSS model is largely dependent on the restraint of parliamentary time, with no indication as yet as to a fixed date for this process. In the transition period, HM Treasury, the current supervisors and OPBAS will work to design a phased risk-managed approach for the transfer of firms and sectors to FCA supervision.

What next?

Firms and their advisors may wish to contribute to the consultation on the FCA's powers under its new SPSS role. They can also anticipate further opportunities for engagement, as HM Treasury, the FCA and the PBSs intend to collaborate closely with the professional services sector in developing transition plans and new regulatory arrangements.

In time, firms can expect changes in administrative processes such as fee structures and IT system interfaces, and will need to familiarise themselves with FCA systems where relevant. But they can also perhaps expect a more intrusive style of supervision, as the new structure looks to address some of the perceived failings of predecessor models.