Source of Funds: challenges and opportunities. A roundtable discussion.
On 1st October Thirdfort hosted a roundtable which brought together conveyancers, lawyers and industry regulators to discuss the challenges legal professionals face when proving the source of client funds in property transactions. Thanks to everyone who attended and contributed to what was a lively and stimulating discussion.
‘Source of funds’ are money-laundering checks that conveyancers and property lawyers must carry out to ensure client money is from a legitimate source. In carrying out the checks, lawyers often require the client to provide up to 6 months of bank statements and answers to a questionnaire which interrogates where money has come from, the answers to which are corroborated by the statements. These checks are highly manual, time consuming and frustrating for both lawyers and their clients. The roundtable aimed to dig into the problems surrounding this process and how it can be improved.
These are the themes we discovered:
Lack of guidance from regulators - it was felt that that there is a significant lack of guidance from regulators, leaving conveyancers and lawyers in the dark as to how to satisfy their regulatory duties. Over the past year, both the SRA and CLC have carried out risk assessments, with the CLC finding only 29% of firms to be compliant with their regulations. However, conveyancers felt that poorly communicated and often unclear regulations mean they are expected to meet a standard they have no knowledge of. These fears extend to the opposing party’s source of wealth, despite having their own acting solicitor, adding additional time and stress to the process.
Client satisfaction -source of funds is a hostile exercise which is affecting the lawyer/client relationship from the start of the transaction. Clients don’t understand what source of funds checks are, so when asked for bank statements and intimate questions about their funds, clients can be hesitant to provide the information required resulting in it being sent sporadically, incomplete and in poor quality making it hard to interpret. This leads to further delays, more unnecessary communication and frustration on both sides.
What can be done?
Guidance - more guidance as to what is considered‘reasonable’ is required from regulators. It is easy to ‘goldplate’ minimum standards so a benchmark in conjunction with worked examples of difficult cases can provide extra guidance and help conveyancers feel more assured. The SRA have convened a project team to regulate firms and have recently sent questionnaires to over 100 firms to understand how they are fulfilling their responsibilities under money laundering regulations. This proactive regulation is a focus of both the SRA and CLC and it is hoped this approach will provide clearer insight as to what is required so they can better service the firms they regulate.
Education - clients require more information on what source of funds checks are. In comparison to 10 years ago, clients are more savvy and willing to share information if they understand why and for what purpose. If clients are better informed from the outset of the transaction, they are more likely to provide the correct information when needed, meaning fewer delays. Thirdfort are working on a client care pack which will contain an easy to understand leaflet on source of funds.
Process – employing people whose role is to onboard clients could be more cost effective than fee earners spending chargeable time doing this work. Additionally, a system to triage documents and information required for source of funds checks to facilitate a conveyancer’s review would also go a long way to help.
Technology –using technology is supported by both the SRA and CLC. Neither regulator will endorse a product, however, a government consultation on electronic ID checking suggests they are in favour of this technology. The CLC added that any testing of new technology should be done in a ‘sandbox’ environment to see if it does reduce risk in the way expected. These factors taken into consideration, technology can provide a much cheaper and faster way to collect the information needed for source of funds checks.
Proving source of funds is a time consuming, costly but incredibly necessary task firms are required to carry. However, outdated methods of collecting the necessary information is making it unduly stressful and time consuming for both conveyancers and their clients. This coupled with a lack of clear guidance from regulators is creating additional stress and uncertainty. The regulators recognise that more needs to be done and are working on strategies to ensure firms are better informed and supported in staying compliant.
However, this could be putting plasters on something which needs completely rebuilding. In a digital world where everything is produced and shared in data form, should mean paper questionnaires and bank statements are a thing of the past. An overhaul of the current system and the introduction of technology to streamline this data collection exercise would not only make it much more efficient, it would improve client satisfaction and ensure robust a more robust approach to fraud.