Trust, Tech & Transactions: Why Law Firms Now Use Independent Escrow Agents - Sue Wakefield - S9E27

0:00Independent escrow agents are now in huge demand. We're very privileged, etc., to work repeatedly with law firms regularly in these transactions. And I think the key to that is, as I said, the FCA regulation giving you that ultimate trust. Once you start a relationship with somebody that's independent and that you can pass all your escrow work to, it becomes a really great working relationship where both parties know exactly what's needed on either side. So a true independent provider is something that most law firms have over the last couple of years started to recognize and work with. On today's Legally Speaking podcast, I'm delighted to be joined by Sue Wakefield.

0:38Sue is the director and head of business development at Zedra. She has over 30 years of experience working in the financial services industry, specializing in onshore trust structuring. Sue also holds a number of leadership positions and is a member of STEP. So a very big warm welcome to the show, Sue. Thank you very much. Great to be here, Rob. Thank you. It's a pleasure to have you on the show. I'm very excited for today's discussion. Before we get into everything, we do have a customary icebreaker question here on the Legally Speaking podcast, which is, on the scale of 1 to 10, with 10 being very real, what would you rate the hit TV series Suits in terms of its reality of the law if you've seen it?

1:17I haven't seen too many editions, I have to be honest. I've seen one or two, but I would probably rate it two or three, I would say, based on what I've seen. Great entertainment, but not sure it's too real. Fully justified. And we can now move swiftly on to talk all about you. So to begin with, Sue, would you mind telling our listeners a bit about your background and career journey? Certainly. Yeah, I'd be delighted to. So I've actually been in the financial services industry for 40 years now. I started my career for Barclays Bank Trust Company, where I predominantly dealt with private client trusts, so on the private client side.

1:58Latter years in Barclays, held some leadership positions and sort of developed my wider skills, I would say. In 2018, Barclays sold its trust businesses to Zedra. and so became part of the Zedra team and then moved into business development which has been a role that I've hugely enjoyed and growing the services that we had already growing our intermediary network and obviously building on on new services and escrow that we're going to be talking about today was one of those services that we did actually and deal with when we were in the Barclays world and that yet's grown considerably over the last couple of years So I'm head of business development now for Zedra in the UK for Zedra's trust company business and also one of the directors too.

2:47Yeah, very impressive, I have to say. And as you alluded to there, we are going to be talking about sort of escrow a bit more. For those who are less familiar, what is it in the context of M &A? So escrow is widely used across many services, but in an M &A context, often the sale of a business brings some issues. and money, a percentage of the sale proceeds has to be put to one side in an escrow account to cover warranties, indemnities, other liabilities, often for about 12 to 24 months in a secure escrow account. Aligned to that, in M &A, we also see payment agent services that Zedra is also involved in.

3:32So that's the actual payment out of the sale proceeds to multiple shareholders on completion day. Love it. OK, and thank you again for giving us such a concise and helpful answer for our listeners to grapple. But why is then, I guess, escrow such a critical tool that's used? Yeah, hugely critical. I think, as you can imagine, in a transaction that can be very complex, we see multiple problems along the way. And I think often at the end of a deal that may have been going on for months and possibly years, there has to be concession on either side. And usually the concession is around making provision for perhaps insurance that's due, taxation that's due, and money has to be put to one side.

4:20And so both parties agree to put X amount into an account that will then be an escrow account. and it actually often saves the deal. So particularly crucial. And particularly if you've been going through a difficult transaction and you come to a stalemate at the end. And that's kind of what I was going to allude to next in terms of, you know, ensuring, you know, you've done a lot of the hard work, you want it just to sort of end hopefully nicely in that sort of M &A deal. Because it's often seen, isn't it, as more of a tick boxing exercise in M &A, but you've called it more of an unsung hero, which I quite like.

4:54So can you explain why it plays that such a critical role and how the wrong provider can actually derail a deal as you're alluding to there yes yeah i think we see regularly that um right at the end of a transaction there's the only then a realization that an escrow account is going to be needed and and it can quickly derail derail a transaction so it's important to work with a provider that is very um can move quickly can move swiftly, is used to dealing with last minute transactions. Zedra has a number of provisions in place to make sure that we can step in and move quickly. I think it's also important to make sure that you're working with an escrow agent that is regulated.

5:43So there are a number of non-regulated escrow providers in the UK. So an FCA regulation is particularly important. also a firm that has good legal underpinning so somebody that's got good legal precedents well drafted that can actually move um confidently forward as you know i'm sure in in the uk our anti-money laundering regulations are particularly high and if you're fca regulated even more so so having a firm that can move swiftly through the collation of anti-money laundering documentation again is really important when you're looking to hit a deadline. And I think finally, somebody that's working with tier one banking institutions.

6:24So you're going to be parking potentially significant sums into an escrow account. You want to put it into a with a banking institution in the UK that you're comfortable with and hits those tier one criteria. And that's the word I was probably going to move on to around trust. You know, it's so important, isn't it? Particularly when you're looking at those high values. What would you say to that in terms of why does it matter that you trust who delivers an escrow for you? Yeah, I think we're very privileged, et cetera, to work repeatedly with law firms who work with us regularly in these sorts of transactions.

6:56And I think the key to that is, as I said, the FCA regulation giving you that ultimate trust that, you know, we're authorized to do it. But actually service levels that are tip top too, they're busy obviously managing the transaction at their end. So knowing that they can pass over the escrow part of work to somebody that's very used to doing it and can do that with minimal sort of effort from their side is particularly important. But yeah, trust is a big thing across financial services. You know, you would always want to work with partners that you trust. but actually working with a partner that is tried and tested in this arena, has good legal precedents, works with top banking institutions and has that FCA regulation is probably the key areas that if I was looking for an escrow agent, I'd look for.

7:50Yeah, and the other word on top of trust, which obviously orbits around lawyers day in, day out, is risk, isn't it? And sort of, you know, many firms default, as you were alluding to, to big banks or perhaps in-house legal accounts for escrow. But what are some of the risks or limitations perhaps with that approach and how does Zedra offer something different? That's an interesting question, actually, because I used to be, and Zedra used to be part of a big bank. So we were barclays. And whilst big banks still offer excellent escrow facilities, solutions, what we've seen over the last couple of years is their minimum entry criteria to offer an escrow account has risen quite considerably.

8:27so when people come to Zedra and say you know what what's your minimum value for you to open an escrow account we don't actually have one so we're happy to do that sort of lower value transaction I mean some of the banks are three million plus now and there are lots of M &A transactions that need to put money you know significantly lower than that so I think that's that's the key thing on the on the big banks the the law firms so so I think this is the biggest reason that escrow agents, independent escrow agents, are now in huge demand. The SRA's rules around client account and banking facilities have been tightened up considerably and all the law firms are now looking at their practices and actually, concerningly so, worried that they're perhaps offering escrow when they shouldn't be.

9:18So the rules say that law firms can't retain client funds post-transaction. So an escrow essentially in an M &A transaction will always be post-transaction. And so they should now be looking to employ firms like Zedra who can support with that. There's still quite a number of gray areas around that SSRA rule. But I think increasingly law firms are thinking, you know, I'd much rather be passing that on to somebody that can do it well. And we're absolutely sure that we're ticking the compliance box from our side. Yeah, and I always talk about specific is terrific in terms of use the experts that are experts at what they do and what they know rather than perhaps, well, maybe we could do this.

10:01We're not sure it's a gray area. And I think you make a very valid point, particularly with regards to the SRA and, you know, just making sure that you're compliant and dealing with someone that just does it day in, day out. You don't even remove that headache, remove that friction. It's a better experience for everyone. And it's just a really good approach. And I guess let's dive a bit deeper then to Zedra's approach because it positions itself as fast, flexible, proactive in an industry that's very much the opposite at times. So can you share maybe an example of where that approach made a real difference to a deal actually closing on time?

10:30On time, yeah. I mean, quite often we're faced with, you know, we need to close a week on Friday. day you need to be ready for it but the one time that that was particularly busy for us if you think back to just before the autumn budget there was rumor arrived that that capital gains tax rates were going to be increased and that caused a real flurry in m &a activity m &a transactions everybody wanting to get in ahead of the 30th of october budget day and so we were already busy but i distinctly remember having a client telephone me on the 26th of October saying, I'm selling my family business.

11:09We really need to have this escrow account in place. Can you do it? And yeah, we said, let's try. Let's try. We pulled out all the stops and actually the account was open, ready on the 29th of October. Sure enough, budget day came, CGT rates went up as predicted. and certainly this particular client saved tens if not hundreds of thousands of pounds in tax. So yeah, that was a really hard deadline that we were very intent on meeting. If you're a client then listening to that, is there things that the client can do in readiness to make your job easier, to maybe make things even faster? Are there things that you could see that maybe some tips, best practices if they're thinking about going down this route?

11:54Yeah. So I suppose I suppose my advice would always be and always is to lawyers that are referring business to us. Please come early in the deal. You know, please come to us as early as you can. We can get all our ducks in a row. We can make sure the AML is covered. But actually, if it is if it is the 11th hour kind of escrow that's needed and be prepared to to share to share information with us. I mean, Zedra, where we really pride ourselves on moving quickly is we have legal precedents ready to go. They need minor tweaking per transaction, but actually they're fundamentally super documents. It takes a lot of time away from lawyers acting on either side.

12:37We also support quickly with AML. So the anti-money laundering work, we use IT to verify, electronically verify people. And we have bank accounts ready and open that the FCA have ruled are acceptable with tier one banking institutions, as I've mentioned already. So it's being prepared to offer the information that we need. But the advice is always come to us as early as you can. Yeah, no, agreed. And just from a curiosity point of view, AI and technology is everywhere and advancements of businesses is everywhere. Are you seeing any tech disruption for good in your area at all? Yeah, definitely.

13:23I think in the escrow world, actually, it's been quite interesting to watch that develop. and there's a number of online escrow agents that have worked very well. Probably there's sort of lower levels. But certainly, identification and verification has been a super win for us, and that has really helped. And I can only see that increasing and improving over years. But probably slightly contrary to that, I still think the old-fashioned service is paramountly important when you're dealing with corporate, particularly corporate deals. Lawyers knowing that there is a dedicated person that they can speak to out of hours as well, if you're dealing with obviously transatlantic deals.

14:09So there's always that element of people skills being particularly important. But yeah, the AI and the IT around the edges are undoubtedly helping. And I'm sure they'll continue to. Yeah, I'm sure they will as well. And again, you've alluded to sort of, you know, with all of this, it's about making and saving deals, isn't it? I think that's the key. So again, could you maybe share a scenario where an escrow made or potentially saved a deal that might have potentially collapsed if not sort of already sorted? I think most of them probably do, if I'm really honest. I think certainly, yeah, as I mentioned at the beginning, the concessionary placing of monies to cover unforeseen eventualities, often, you know, if that wasn't put in place, I'm pretty sure deals wouldn't happen.

14:57So I think they almost make or break a deal almost every time. But there's probably a slightly different example that might be worth sharing. And we've seen quite a few of these just recently where landowners are giving up land for solar farms. So quite, you know, quite topical and obviously something that will increase. One of the main reasons that they're willing to do that is if money is put aside in an escrow account for the life of the solar farm, so probably 30, 40 years. So a significantly lengthy escrow account, I would say. And that money is used at the termination of the solar farm's usage to make good the land, restore it to its original condition.

15:42And actually, without that escrow account and that ability to do that, I'm pretty sure landowners wouldn't agree to those sort of arrangements. So probably just a slightly different one, but actually something that escrow is being used for increasingly. Today's episode is brought to you by Clio. Are you frustrated with your current legal management software? You're not alone and thousands of solicitors across the UK feel your pain. However, the hassle of moving all their existing client and case data holds most back from switching, prolonging the frustration. Clio is here to help. Their dedicated migration team will be with you every step of the way while you transfer your information.

16:23And if you have any questions, you'll get award-winning support available 24-5 by live chat, phone and email. So help is always there when you need it most. It's no wonder Clio is consistently receiving five-star ratings for its ease of use and top-notch service. If you're ready to leave frustration behind, visit clio.com forward slash UK to learn more and see why Clio continues to be the go to choice for solicitors across the UK. Now back to the show. I'm just thinking for maybe business owners or people looking at M &A deals. Does it affect things if you're other regions, other international parts?

17:00Is there anything that people need to be taking into consideration? No, that's a really good point. I mean, certainly from Zedra's perspective, we deal with international deals regularly. And it's quite unusual to have two UK parties, if I'm honest, these days. There's often one UK party and then an international one. even more important i suppose to have that multi-currency opportunity so we work obviously in u.s dollars euros as you would expect um but that ability to to make payments in multi-currencies using great banking facilities and to have a service that can support and as i mentioned out of hours uh communication if if need be but yeah it's as i say very unusual for it all to be UK base these days.

17:47Yeah and that's the world we're in, the more connected international world that we live. You've talked a lot about Zedra's approach, I kind of want to sort of put a twist on that in terms of first-class service. We always talk about sort of it's not enough to satisfy clients, you want to delight clients and go above and beyond. So from a Zedra perspective how do you ensure that you deliver that first-class service to your clients time and time again? Is there anything unique within your process or things that you do? I think we do it really well and that's supported by the number of repeat clients that we have.

18:19For me, probably top of that list is dedicated relationship support. So from the very first moment that somebody contacts us, we provide a fee quotation, we provide a very detailed list of due diligence requirements. So all up front, they can see exactly what is expected of them. But yeah, dedicated relationship team that are there and willing to support out of hours if necessary. and I also think the legal precedents that I mentioned earlier so the fact that a lawyer is not having to draft an escrow account or an escrow agreement on each occasion that you know cuts through the time time barrier both sets of lawyers can review that at the same time and it's it's done and dusted as far as far as they're concerned so yeah first class service means exactly that direct line telephone numbers so that we can be reached and the willingness to be available to them even if they're you know doing a USD or so evenings and weekends too when needed.

19:26Yeah I think it's like you're saying responsive human and high quality and I guess that's comes on to client expectations there we talked about the first class service but the only thing that changes is constant change right in business and expectations so in your area how are clients expectations around escrow and payment services generally evolving particularly as you mentioned a lot of them tend to be cross-border or high-stage transactions yeah i think payment services is is worth mentioning actually and that's an area that we've seen increase considerably over the last 12 24 months probably and again this is the de-risking attitude of law firms so just just to to recount this is where we collect the sale proceeds on completion day and actually distribute that to multiple shareholders usually.

20:13And they are almost certainly not in the UK. The majority of them will be overseas. So I think that's the expectation of clients is that that happens seamlessly. And there's quite a bit of work up front to ensure that that happens seamlessly on completion day. and again you can imagine you're expecting a huge sum of money to land in your bank account as a shareholder if it hasn't arrived by you know close of business that day they're expecting people to quite rightly so do some interrogation where is it has it been caught somewhere in the banking system so it's client expectations are high and it's exceptionally important that we meet them and exceed them as you're saying but the payment services i've seen a real increase in expectation of our service in that sort of area.

21:04Yeah, and I'm sure it'll probably continue to sort of increase as well as time goes on. I talk a lot about when you're in sales and professional services, time, quality and cost. I think we've talked a lot about the time and the quality, but the cost. Let's talk more about the cost because do you feel the costs associated with putting in pace an escrow account are acceptable? Or maybe could you give some examples of what typical costs might involve? I think it's probably worth looking at the alternatives to ESCO to be able to compare. Is it acceptable? Is it worth doing? And historically, insurance has been used.

21:37So to give the example of the M &A, so they, you know, a lawyer would take out an insurance premium to cover the potential clawback of funds. and insurance premiums have gone up insurance is typically harder to to actually gain as well these days the difference of course with escrow is that the money is still there and the money if not used actually returns anyway so and you don't lose you don't lose the um the sum that you put put forward not only do you not lose it interest is earned on the escrow accounts that we look after at exceptionally good rates. So they're all reasons to make the fee that we charge for an escrow account so much lower.

22:26And you can actually offset, I suppose, the interest on the fee that Zedra will charge. Historically, I think fees have been set around, and maybe this is more around the banks actually, set around percentage rates of values that are put in escrow. and Zedra has never charged on that basis. We charge on a fixed fee basis based on a certain number of criteria. But to give you a couple of examples, so if we were to set up an escrow account for£200 ,000,£300 ,000, something like that, fairly simple, we would charge around £2 ,000 plus VAT to do that. And that would be an all-inclusive fee, including the legal documentation.

23:11So often when I'm quoting fees actually for escrow, people are like, oh, I thought it'd be much more expensive than that. Obviously, there are boundaries and fees do change. But I think the perception is that it's going to be more expensive than it is. And is there a minimum time you have to have an escrow account for? And on those sort of interest levels, if it's for a longer period, do you guarantee higher rates? Is there anything connected to that at all? No, we don't at all, actually. So there's no minimum time and interest rate is flat across the board. And as I mentioned, the solar farm one, some of them are quite long arrangements, some very, very short.

23:51The average is probably 12, 18 months, something like that. But because we pool cash in our accounts, we have very attractive interest rates for low value escrow accounts. So again, worth considering. And life happens, things happen, things change. If it starts off by saying escrow for five years, but maybe it's four years, use the example there of like 30 or 40. How does that work? Is that once it's fixed, it's fixed, can't be changed? just give us a bit of a flavor. And that's a really good point, actually, Rob. So the legal precedents that we use are very flexible. So there's always the opportunity.

24:33And you're absolutely right. You know, when you set an escrow account, you have an idea of how long you're going to need it for, but there's nothing. So funds can be released at any point during that period of time. We tend to quote fees based on what we've been, estimates we've been given, but again, very very flexible to be able to change those yeah similarly they can be extended so you know if you um because in the precedent agreement actually there is a sort of long stop end date but actually we've reached some of those and and the funds are still needed to be retained so that can be extended again by mutual agreement of both parties okay and obviously we have a lot of lawyers and law firms who who tune into the show that you know maybe they're looking at these routes or looking at new providers?

25:21You've touched on maybe the relationship side, but is there anything the lawyers could be doing to make your lives easier from a collaboration point of view you would like to see lawyers do more of? I think actually looking for escrow, independent escrow providers, I think that's probably still an area that whilst they've started to explore over the last couple of years, not as much as maybe they should. And I know there are still law firms that are still erring on the side of, you know, we're okay, we're still within the SRA guidelines. But actually, once you start a relationship with somebody that's independent, and that you can pass all your escrow work to, it becomes a really great working relationship where both parties know exactly what's needed on either side.

26:07I think the independence is also really important. So two parties to a M &A transaction, and then only one of the lawyers retains the funds, there's sometimes a bit of nervousness on the other side. So a true independent provider is something that most law firms have over the last couple of years started to recognise and work with. Yeah, and like you say, that relationship piece as well, you probably get to really know one another, the kind of working practices. You can be a lot more quicker, efficient, and it's more tailored services. Okay, let's look forward then. What future developments can we expect regarding sort of escrow in the coming 5-10 years, would you say?

26:52We've probably touched on it a little bit. I would say definitely more on the IT and the AI side. And I probably see that more coming around the anti-money laundering side of things. But interestingly, a lot of the escrow work has probably emanated from the US. Everything they do involves escrow. certainly their real estate you know normal sort of individuals buying selling properties use escrow that hasn't yet come come over the over the Atlantic possibly may and heard you know over the last couple of years possibly that that may happen so um I think the use of escrow will continue to to increase and I think it's a great vehicle across I mean I know we've specifically talked about M &A here today but the construction industry, real estate generally, private equity deals, you know all of that sort of work we regularly see escrow being needed for a variety of different reasons.

27:55So I can probably see escrow expanding further into perhaps more into private client work that's here to stay. If I may just sort of lean in a bit more on that because again in terms of these areas or again for other lawyers or from people from other areas who might be thinking about this as well like you know you mentioned private equity construction would you go a little bit deeper in terms of what you what you see and maybe just a couple of examples just yeah no very happy to and we've seen increasingly construction actually and that's probably worth mentioning that historically they used they used bonds to cover their liabilities and that bonds have become very expensive, become very scarce, and escrow has become the new norm, I think, across construction.

28:40And nervousness, the reason I think most of these deals are put in place is nervousness on both sides in terms of solvency of businesses. Again, probably since COVID, we've seen a real increase in there. And escrow accounts are used slightly differently in the construction industry. So they tend to stage payments out during the life of the escrow. So you imagine, you know, a multi-million pound office block and they're using the escrow to fund the glazing company, for example. So as various landmarks in the construction process are hit, money is then passed out. And it just gives confidence on either side that, first of all, the funding is there to pay the contractor.