A series of new regulations, either recently introduced or due to come into force, are set to bring significant implications for the accountancy sector. For firms, these new regulations (around anti-money laundering, register of overseas entities, probate and PII) create risks, at such time until they are embedded into business-as-usual practices. In order to minimise the likelihood of increased premiums, accountancy firms should take steps to familiarise themselves with the regulations and implement necessary changes as soon as possible.
Changes to AML regulations
In September 2022, updates to the existing UK anti-money laundering (AML) legislation came into force. In particular, the updates made a number of amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).
Although many of the changes do not affect accountancy firms, there are certain areas of which they should be aware:
All supervised firms are now required to perform a proliferation financing (PF) risk assessment (opens a new window) to assess the risk that it may be used to enable proliferation financing
Discrepancy reporting requirements are no longer limited to the onboarding stage of a business relationship, but have become an ongoing obligation
The MLRs have been widened to apply to Limited Partnerships registered in England and Wales and Northern Ireland (Scottish Limited Partnerships are already subject to the regulations).
Failure to comply with AML regulations (opens a new window) can have serious consequences for the offending firm, including fines and sanctions, criminal proceedings and significant reputational damage. Firms at the point of renewal for their PI cover should anticipate additional scrutiny from insurers around the newly introduced regulations.
Register of Overseas Entities
On 1 August 2022, the UK government introduced the register of overseas entities (opens a new window) (ROE): a new requirement for all overseas entities that own property in the UK to record information about themselves and their beneficial owners on a new register at Companies House by 31 January 2023. As part of the registration process, accountants may be required to perform verification of an overseas entity’s registrable beneficial owners.
By nature, this is risky work, as an overseas entity will involve corporate structures spanning multiple jurisdictions. The inclusion of a strict liability within the ROE regime raises the possibility that any firm undertaking verification work will be exposed to possible criminal prosecution, regulatory sanction (opens a new window), and reputational damage should the verification function not be performed correctly.
Firms’ increased liabilities under the ROE are already giving insurers cause for concern. The heightened exposure of accountancy firms to overseas entities raises the possibility that such firms will be used for the purposes of money-laundering or sanctioned individuals, where it is not possible to correctly identify true ownership.
Following the withdrawal of the Association of Chartered Certified Accountants (ACCA) from legal services, all accountancy firms wishing to offer probate work to their clients must set up a separate limited company or LLP firm to be designated as a CILEx-ACCA Probate Entity.
All owners and directors of the Probate Entity must also be authorised as CILEx Practitioners, which requires first successfully completing an accredited course and assessment with an approved provider, covering specific areas of probate work.
In the absence of standalone insurance products for probate work, all work conducted by the Probate Entity must be covered under the accountancy firm’s general professional indemnity (PI) insurance.
In addition to the above external regulations, changes to the ACCA professional indemnity (PI) insurance regulations (opens a new window) are due to come into effect in September 2023.
The main changes are:
The minimum limits of indemnity will increase from £50,000 to £100,000, which will affect smaller practices. It has been recognised for some time that this limit is not sufficient to reflect increasing legal costs and claim payments. Other income bands and limits have also changed.
The minimum limit for Fidelity Guarantee Insurance (FGI) has increased from £50,000 to £100,000 and firms need to ensure sub-contractors are covered. This is an area where we’ve seen a number of claims in recent years.
Retroactive date requirements have been clarified and should reflect the date the practice commenced. This is to counteract issues such as where some insurers state ‘when PI cover was first purchased’, which places onus on the insured to prove they have had cover for past liability.
For certain high-risk activities where it can be difficult to place PI cover – such as tax mitigation work, financial services, and cyber related events – this can now be placed on an aggregated basis, as insurers can be more inclined to quote.
Members and firms have a period of time to adjust to the changes in the PII requirements and obtain PII cover which is compliant with the new regulations. Under transitional arrangements, PII policy renewals on or after 1 January 2024 must comply with the new requirements. All existing PII policies must comply with the new requirements by 1 January 2025. Early adoption is permitted.
To avoid an increase in premiums, firms should take an active approach to ensure that they familiarise themselves with the new regulations, and take steps to address potential exposures:
Identifying the ways in which AML regulations demand a change in business practice, and instilling the appropriate changes as part of business-as-usual practice as soon as possible.
Firms should consider carefully whether they should undertake ROE work, weighing the business rationale for doing so against the potential risk exposures.
If they do undertake ROE verification work (opens a new window), firms should ensure that verification is completed based on documents from a reliable source, independent of the client, and they should consider how often verification procedures must be repeated.
Where required documentation for the ROE is only available to a client, firms should consider how else they might verify the information (for example, by seeking confirmation from the legal firm that drafted it).
Where firms have created a separate Probate Entity for the undertaking of probate work, they must ensure all owners and directors are authorised as CILEx Practitioners (opens a new window)
All practising staff should be made aware of the relevant updates and training provided to ensure compliance with AML, ROE verification, probate, and ACCA PII requirements.
On 20 September from 12.30pm-1.30pm, please join us for a webinar to discuss regulatory changes and the impact this may have on your insurance. This session will further explain the changes and the implications for ACCA practitioners, and the transitional arrangements. Register now (opens a new window).
For further information, please visit our Lockton for Accountants (opens a new window)page, or contact:
Catherine Davis, Vice President
T: +44 (0)117 906 5069