More and more law firms are thinking about using a third-party-managed account (TPMA) as an alternative to holding client money, rather than operating their own client account. So what is a TPMA, and why do some law firms see it as an attractive option.
We define a TPMA as an account where a third party (a payment service provider) holds money on behalf of two or more transacting parties. For law firms that means a third party would hold funds for you and your client.
Is a TPMA right for my firm?
TPMAs will be right for some firms, and not others. It will very much depend on your individual business, and how you think you can best manage the risks related to holding client money.
Although using a TPMA comes with some costs, they can also reduce the overall costs associated with running your firm, especially if you only occasionally hold client money. This is because outsourcing the way you manage client money might reduce your professional indemnity insurance premium, your firm’s contribution to the Compensation Fund or having to engage an accountant to prepare a report.
There are potential benefits beyond cost-savings. It would be impossible to eliminate all risk related associated with the holding of client money including for example, cybercrime, but TPMAs could be a more secure way of handling client money. Those of you worried about cyber-attacks – a priority risk for us at the SRA – might find they offer more protections. Criminals are aware that law firms will hold large sums of money in a client account, and they are continually looking to get around your security arrangements, and those of your clients.
In the first six months of 2019, law firms reported a loss of more than £731,250 of client money to this type of crime. It is not a problem that is going away.
Using a TMPA may also help address your firm’s money laundering risk. The Money Laundering Regulations mean that you must assess the risk to your firm of being used for money laundering and put in place policies procedures and controls to mitigate that risk. You might want to consider using a TMPA to help manage certain high-risk transactions, clients or services.
Using a TPMA does not of course mean that you don’t need to do the appropriate customer due diligence (CDD), but it can reduce your risk because you will not be handling funds through your client account.
Greater flexibility
The legal services market is evolving at pace This is due to both external factors and moves by some firms to find new ways to deliver high quality services to clients. Your firm might be one of those that is already being innovative, or you could be about to look at changes to the way you work.
TPMAs might provide you with an opportunity to adapt to the changing legal market and continue the success of your firm. Lenders for example, might be more willing to engage with you as a sole practitioner knowing that you will not be holding or receiving mortgage monies.
Regulating TPMAs and our Accounts Rules
As part of our major programme of reform, we revised our Accounts Rules to make them easier to follow and place more trust in your professional judgement. Our new Accounts Rules also provide certainty about the steps we expect you to take when considering the use of a TPMA.
A TPMA can be used for receiving payments from or on behalf of, or making payments to or on behalf of, the client in respect of regulated services delivered by you to the client. It is important to note that the money held in a TPMA will not fall into the definition of client money. Therefore, a substantive part of the Accounts Rules will not apply.
When approaching a TPMA provider, one of the key things to remember is that using a TPMA doesn’t absolve your obligation to act in the client’s best interests or take steps to safeguard a client’s money or assets. You will need to carry out an assessment of the suitability of the TPMA in the particular circumstances for a particular client. We would also expect you to make sure that clients understand the basis on which the money is held, that it is different to a regular law firm client account and the regulatory protections that apply.
The future for TPMAs
It is not for us to endorse TPMAs or to say whether they are the right option for your business. However, our objective is to give you more flexibility, so you can choose the right approach for your business and your clients.
It is still fairly early days for TPMAs, and the current range of products is limited. TPMA providers need to offer services in a way that is commercially attractive to you (and your clients) as an alternative to holding client money while providing sufficient speed and security of transactions.
The provider market may grow as law firms seek out suitable TPMA services. We welcome the interest from law firms and hope to see greater choice for firms and their clients, while still enabling solicitors to focus on what really matters – keeping client’s money safe.
Jatinderpal Loyal
Policy Associate, SRA
About the author:
Jatinderpal Loyal, Policy Associate, SRA
Since joining the Law Society Group in May 2003, Jatinderpal has played a key role in developing the SRA’s approach to outcomes-focused regulation and the supervision of firms. Jatinderpal has led on the SRA’s approach to monitoring the ban on referral fees in personal injury and the regulation of financial services. Of late, his work has focused on the SRA’s Accounts Rules and Client Protection arrangements and improving the SRA’s engagement with firms of all sizes as they embed the SRA’ Standards and Regulations.
Jatinderpal works closely with law firms of all sizes to help inform policy development. He also works closely with the Ministry of Justice, the Financial Conduct Authority, HM Treasury, Reporting Accountants and other law firm compliance forums.