Law firms across the UK are bracing for one of the biggest regulatory shifts in years, as the government moves to hand direct oversight of anti–money laundering (AML) compliance in the legal sector to the Financial Conduct Authority (FCA) — a step many experts believe could fundamentally reshape the profession.
At present, supervision is fragmented across nine different regulators, a structure ministers say has created loopholes and weak enforcement. Officials argue that the scattered framework has become a “soft spot” for compliance, inadvertently allowing criminal networks to exploit the system.
The National Crime Agency estimates that nearly £100 billion is laundered either within the UK or through it every year — and in some instances, law firms have been seen acting as “enablers”.
Following the Financial Action Task Force (FATF) review in 2018, the UK has repeatedly been criticised as an emerging “hub” for illicit financial flows. That assessment highlighted gaps in oversight across the legal and accounting sectors, noting that risks were not being effectively controlled. Since then, successive national risk assessments have consistently labelled the legal sector “high-risk.”
With the next FATF review scheduled for August 2027, the government now wants reforms implemented at speed. According to financial-crime expert Priya Giuliani, a partner at consultancy HKA, “This isn’t coincidental — the UK needs to demonstrate a credible, effective supervisory framework before 2027.”
FCA Steps In — ‘Sharper Swords’
The FCA already has extensive experience monitoring AML controls across banks and financial institutions. Its remit will now expand to cover professional services such as law firms, accountancy practices and trust service providers.
Currently, oversight of solicitors is largely driven by the Solicitors Regulation Authority (SRA) — but its fining powers remain limited. The SRA can impose penalties of only up to £25,000, and larger cases must be referred to a tribunal. Last financial year, the regulator issued penalties totalling roughly £1.5 million across 86 AML cases.
The contrast with the FCA is stark. Over the same period, the FCA issued six AML fines ranging from £289,000 to £39.3 million, with total penalties reaching about £82 million. Analysts expect that level of consequence to significantly heighten pressure on firms to strengthen compliance — and could also make it harder for new firms to enter the market.
HKA data shows that in 2023–24, the FCA rejected 44% of 275 firm applications, while the SRA approved all 218 that came before it.
Data-Led Supervision
The FCA is known for its emphasis on data analytics, reporting discipline and risk-scoring. Giuliani notes that while the SRA traditionally relied on guidance and collaboration, the FCA is likely to deploy a stricter, data-centric approach, moving faster and acting more decisively where breaches are detected.
FCA executive director Steve Smart has made clear that tackling financial crime is one of the agency’s top priorities. The regulator, he said, will pursue a “proportionate and partnership-based” model — but will not hesitate to take firm action when required.
What Comes Next
Although the final implementation timeline remains unclear, the direction of travel is unmistakable. For the legal sector, the message is:
- Stronger client due-diligence
- Stricter reporting of suspicious transactions
- Greater transparency in internal audits and record-keeping
Experts believe the reforms may make the sector more expensive and demanding, but also more credible. And when the FATF returns in 2027, the UK will want to show it has sharply reduced the space for “dirty money” to move through its legal infrastructure.
