Geoff Dunnett, Managing Director of Shieldpay, explains everything you need to know about Third-Party Managed Accounts (TPMA), why they are increasingly being used in the legal sector and explores some of the doubts law firms have around making the switch.
What is a Third-Party Managed Account (TPMA)?
Parallels can be drawn between a TPMA and a ‘designated account’ or ‘escrow account’. It is an account where a payment service provider regulated by the Financial Conduct Authority (FCA) holds money on behalf of two or more transacting parties.
The Legal Services Board launched the idea of using a TPMA in their ‘Proposals for alternatives to the handling of client money’ briefing paper in 2015. The main perceived benefit of using a TPMA is that it can greatly enhance a firm's ability to manage risk and provide better consumer protection on funds.
Traditional escrow or designated account services are considered time-consuming, costly to set-up and are ill suited to the day-to-day operations of a modern law firm. They are mostly used in higher value construction, property, corporate and finance transactions where there is less sensitivity around costs and speed of execution.
Improvements in technology and the wider acceptance and adoption of digital KYC and AML has meant that TPMA and escrow solutions can be delivered in a more cost-effective and user-friendly manner. Firms can now seriously consider them as a viable alternative to a traditional client account.
TPMA providers may differ in the services offered as part of their solution. Shieldpay’s TPMA solution provides integrated KYC/AML services, payment acquiring services, ongoing transaction monitoring, bank account verification, payment settlement and financial statements through one complete digital platform.
What types of transactions are firms using Shieldpay’s TPMA solution for?
A TPMA can be used for any type of transaction but largely we have firms using our solution for:
- Fees on account
- Property transactions
- Fundraising and collective investment schemes
- Family & Probate
- Litigation settlements
- PI claims and management
- Complex cross-border corporate or commercial transactions
Firms also look to Shieldpay for one-off transactions where they consider there to be a risk of being in breach of Rule 3.3 of the Solicitors Accounts Rules (SARs), providing banking facilities. In those cases, either our corporate escrow or paying agent solution is more suitable, removing the law firm completely from the transaction.
Are there other uses/industries using TPMA?
Outside the legal sector, industries that hold client funds as an ancillary activity to the professional service have adopted TPMAs. Lenders, accountants, property managers and other financial services companies are now recognising the advantages and opportunities that come from using a TPMA solution.
What is the relationship between the parties?
Each TPMA provider is likely to operate in a different way. The Shieldpay TPMA offering works by way of a tripartite relationship between the TPMA provider, the client and the law firm. Shieldpay contracts directly with the law firm for ongoing services, the law firm sets out the use of Shieldpay under its engagement terms and the client agrees to being bound by Shieldpay’s terms and conditions in accepting the law firm’s engagement terms.
What are the rules and regulations for legal services using TPMAs?
The BSB has long mandated that barristers cannot directly hold client funds and CILex has always provided for the use escrow accounts but recently both the SRA and CLC have introduced new rules to explicitly permit the use of TPMAs to manage risk, protect clients’ interests, and give greater freedom for firms to innovate, compete and grow.
Focusing on the SRA Account Rules (SARs), the use of a TPMA must comply with rules 11.1 and 11.2 and associated guidance. Firms must:
- Ensure the TPMA provider is authorised and regulated by the FCA.
Any provider engaged must be an authorised payment or small payment institution.
- Ensure the use of the account does not result in the firm receiving or holding the client’s money.
On review of terms and conditions and other contractual arrangements the firm must be careful to not become trustee of the funds.
- Take reasonable steps to ensure, before accepting instructions, that the client is informed of and understands the arrangement.
Both the firm’s and the TPMA provider’s engagement terms must be clear and set out appropriately to the client. In particular: (i) who will be responsible for paying the TPMA fees (firm or client); and (ii) how the client can dispute a payment.
- Obtain regular statements that accurately reflect all transactions on account.
Funds held with a TPMA are not considered client money meaning there is no requirement to have audited accounts in relation to those funds. There does, however, remain a requirement to keep accurate and appropriate records of TPMA transactions. The payment provider should provide statements to satisfy this requirement.
What are the benefits of using TPMAs?
In speaking to our clients, we have found the following key reasons why law firms use our TPMA solution:
- Lower cost: Using a client account comes at the cost and burden of (i) contributing to the compensation fund; (ii) preparing yearly audited accountants report; and (iii) PI Insurance premiums for holding client money.
- Reduced regulatory risk: With a TPMA solution, law firms remove the risk of breaching regulation related to innocent mistakes and no longer need to deal with residual balances.
- Improved internal processes: Fee earners and legal cashiers are still in control of the process when using a TPMA, but they also benefit from additional protections and improved systems.
- Strengthened cyber security: Law firms want peace of mind against the threat of cyber criminals and phishing scams.
- Increased efficiency: Teams are able to gain efficiencies in their practice and reduce the number of unbillable tasks.
- Enhanced client service: Managing transactions through a digital platform ensures all parties involved have full visibility of the scheduled payments, enabling there to be added transparency, security and trust in the relationship between law firm and client.
What’s stopping all law firms from using TPMAs?
It’s important to address the reasons why law firms have expressed uncertainty in making the switch from client accounts to TPMAs:
1. Doubts of risk mitigation: It cannot be claimed that using TPMAs prevents claims against a firm’s PII but, by design, a TPMA solution forces a law firm to follow strict policies around AML/KYC. The real impact of this and how this is translated into PI Insurance premium cost savings is not yet fully quantifiable.
2. Questions around cost and administrative burden: For some low value transactions, hiring a third party can come at a higher cost and add a perceived level of unnecessary complexity. However, in more complex instances, firms should not under-estimate the savings that using a TPMA could bring in terms of time and resource. Using a streamlined payments solution, legal teams can reduce their unbillable hours dealing with residual balances, preparing statutory accounts, and managing communications with the client about fund statuses, and instead reallocate their time to more pressing legal matters while maintaining high quality customer service.
3. Lack of flexibility: Due to strict policies and procedures, a TPMA is more of a black and white solution, unable to undertake a case-by-case risk analysis and factor in the more individual details in such instances as receiving funds from a particularly high-risk client. Depending on the FCA/other regulatory permissions, a TPMA may also have limitations as to the jurisdictions in which funds can be received, making it impractical for certain law firms.
What is the process to switch to TPMA?
It is not an either-or situation. Firms can choose to close the client account completely and migrate all funds to a TPMA or they can operate a TPMA alongside existing client accounts. We are seeing a rise in more established firms interested in the latter, using client accounts as the standard but TPMAs for high value or more complex transactions where the cost of administering the transaction and risk of holding funds greatly outweighs any perceived benefits or any fees generated, as these are often not charged to the client.
What has the uptake been?
While a growing number of firms are now using TPMAs, there is still a long way to go until full adoption by the industry. At Shieldpay, over 2020/21 we saw an average 29% growth Month on Month from new business and increased adoption from existing TPMA users and we processed over £200m in payments. With the continued hardening of the PI Insurance market and the silent cyber review along with the openness to transformation precipitated by the Covid pandemic, we are seeing a greater interest in our TPMA solution.
This article was first published in the ILFM Legal Abacus Special Edition on Third Party Managed Accounts.
Shieldpay's technology-led solution provides Third-Party Managed Accounts (TPMA), corporate escrow and paying agent services across the professional, financial and legal services industries. Get in touch to find out more.