Escrow Accounts vs. Third-Party Managed Accounts

Introduction

In the legal and financial sectors, managing client money securely is a fundamental requirement. Law firms and their clients often encounter two distinct financial arrangements: escrow accounts and Third-Party Managed Accounts (TPMAs). While both serve as mechanisms to safeguard funds and manage disbursements, they operate under different principles and regulatory frameworks.

Understanding the differences between these two arrangements is critical for law firms that manage client money, whether for transactions, legal fees, or dispute resolution. This blog will provide an in-depth analysis of escrow accounts and TPMAs, explaining their applications and how law firms interact with them in practice.

What is an Escrow Account?

An escrow account is a financial arrangement in which a neutral third party holds funds on behalf of two or more parties involved in a transaction. These funds are only released when specific pre-agreed conditions are met.

Escrow accounts are widely used in various industries, particularly in:

• Real estate transactions: When buying or selling property, an escrow account ensures that the funds are only transferred upon completion of legal and contractual obligations.
• Mergers and acquisitions (M&A): Businesses often use escrow accounts to secure funds until all acquisition conditions are satisfied.
• Litigation settlements: In legal disputes, settlement funds may be placed in escrow until all parties comply with the conditions.
• Cross-border trade: When two parties in different jurisdictions transact, an escrow arrangement provides an extra layer of security against default.
• Construction contracts: In large construction projects, escrow accounts can be used to hold retention funds or milestone payments to ensure contractors are paid upon completion of agreed stages of work, mitigating financial risk and ensuring compliance with contract conditions.

How Escrow Accounts Work

1. Agreement Formation – The parties involved agree on the conditions under which the funds will be released.
2. Depositing the Funds – One party deposits the agreed amount into the escrow account, held by an independent escrow provider (typically a bank, law firm, or specialist financial institution like us).
3. Verification and Compliance – The escrow provider monitors the compliance of all parties with the agreed conditions.
4. Fund Release – Once the predefined conditions are met, the funds are disbursed to the appropriate recipient.

Escrow accounts are valuable because they provide trust and assurance that funds will only be released and payments only made when contractual obligations are fulfilled.

What is a Third-Party Managed Account (TPMA)?

A TPMA is a financial arrangement in which a regulated third-party provider manages client money on behalf of a professional services firm, such as a law firm. Unlike an escrow account, where money is held passively until conditions are met, a TPMA allows for active financial management, ensuring that payments and disbursements align with the firm’s operational needs.

TPMAs are particularly relevant in the legal sector because they provide an alternative to traditional client accounts, which firms must maintain under strict regulatory guidelines. The UK Solicitors Regulation Authority (SRA) allows firms to use TPMAs as a compliant way to manage client money without holding it in-house. This can help mitigate risks related to compliance, security, and administrative overhead.

How Third-Party Managed Accounts Work

1. Agreement Between Law Firm and TPMA Provider – A firm partners with a regulated TPMA provider to handle client money on its behalf.
2. Client Funds Deposited into the TPMA – Instead of holding client money in its own account, the firm directs payments into the TPMA.
3. Management and Disbursement – The TPMA provider follows the firm’s or solicitor's instructions to disburse funds for legal fees, settlements, or payments to others while ensuring compliance with SRA rules.
4. Security and Transparency – Funds remain safeguarded, and the law firm benefits from full transparency, reducing regulatory risk.

TPMAs offer several advantages over traditional client accounts, including improved compliance, reduced financial risk, and operational efficiency. Firms can focus on delivering legal services rather than managing complex client account regulations.

Key Differences Between Escrow Accounts and TPMA's

While both escrow accounts and TPMAs involve independent financial oversight and control, they serve different purposes. Below is a comparative analysis of the two:

Purpose

Escrow Accounts secure money for a specific transaction or obligation, whereas TPMA's are used by professional service providers to manage their clients' money.

Who controls the funds?

In an escrow arrangement, the escrow agent (an independent third party) controls the money according to the requirements of the escrow agreement, whereas in a TPMA, although the TPMA provider is the managing party, the terms of the TPMA will usually allow the professional service provider to give instructions (as if they had a 'mandate' in a normal bank account scenario).

Escrow / TPMA Use cases

Escrow: property purchases, legal settlements, M&A transactions, aircraft purchases, superyacht or ship purchases,  construction contracts, and also in low-cost or free-of-charge schemes for security for expenses, or construction retention deposits

TPMA's: legal fees on account, disbursements, probate and executor accounts, FF&E/OS&E procurement accounts, construction project bank accounts

Escrow / TPMA fund release conditions

In each case, the escrow agent/TPMA provider will only release the money in line with the agreed terms - for an escrow, those terms will usually be 'hard-wired' into the agreement, whereas in a TPMA the release terms might be according to the solicitor/advisor's instructions.

Interest on escrow / TPMA funds

It is unusual for escrow / TPMA accounts to be interest-bearing.  

Beneficiary's role in an escrow / TPMA arrangement

In an escrow arrangement, the beneficiary will have little control - the conditions are all pre-agreed and baked into the agreement.  TPMA's are much more flexible, with the parties having the ability to decide after the deposit of funds exactly where they will be going.

Conclusion

Both escrow accounts and TPMAs provide structured ways to manage money, but they serve different functions in a law firm's operations.

• Escrow accounts are best suited for securing money in transactions where conditions must be met before disbursement.
• TPMAs offer a compliant, efficient alternative to traditional client accounts for managing legal fees and disbursements.

By understanding how each financial arrangement works, firms can optimise their approach to client money management, improve compliance, reduce risk and enhance operational efficiency.

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