Private escrow accounts provide security, trust and transparency to ongoing or ad-hoc payment requirements.
An escrow account (or, often, simply 'an escrow') is simply a 'normal' transaction between two parties, but with the addition of an independent third party who helps to secure the transaction and ensure that all of the relevant conditions for payment are met. The purpose of setting up an escrow account with a third party is to receive the funds from the buyer, hold them securely until certain conditions are met, and then to pay them to the seller.
In the UK, the use of escrow accounts is much less common than in certain other overseas jurisdictions. This is partly because the UK legal system allows for transactions to take place on the exchange of solicitors' undertakings, which come with almost the same level of security and protection, but without incurring the additional cost of including an escrow agent.
A challenge to this, however, is that solicitors are required to act in the best interests of their own clients, which introduces an element of risk, however small, in the arrangements that only the use of an escrow account can address.
Escrow services are not just used in low-trust environments - they are a really helpful mechanism to secure high-value or long-time-frame transactions and are often considered to be a viable (and, indeed, preferable) alternative to insurance policies.
Escrow services are often used for deposits, where a seller will wish for a buyer to make a deposit (because they won't want to begin the sales process in earnest without this comfort), but the buyer won't wish to give the money to the seller (because if the purchase doesn't complete, it might be difficult to recover those funds) until certain conditions are ensured.
In a deposit scenario, the parties will agree with the third party escrow agent the terms on which they will act - receiving the deposit from the buyer, holding it and, if the transaction completes, paying it over to the seller (or, if it doesn't, the circumstances in which they will return the money in the escrow account to the buyer).
Construction projects are the best examples of when escrow accounts are used to manage transactions that take place over a prolonged period of time. Often in a construction contract, the commissioning client will wish for the construction company to undertake works and only bill them monthly for works done - during that period of works before the contractor gets paid, the contractor is effectively granting the client often considerable credit terms without any security for payment.
This is where escrow accounts can come in, with the employer/client depositing a security sum with an escrow agent so that, in the event of non-payment by the client, the contractor can have recourse to the sums held in and escrow account to pay for the works that have been carried out on the client's project.
When transacting art, watches and jewellery, fine wines or even yachts and private aircraft, the value of the transactions and the requirement for authentication or surveys mean that escrow accounts can provide much-needed comfort to both parties.
It might be, for example, that the price for a piece of art is agreed, but that the buyer requires that purchase price will only be paid once an expert has examined the piece for authenticity, or in a large yacht or aircraft, only once finance has been released, or certain works have been carried out, or certain survey results achieved.
Escrow is sometimes compared with before-the-event insurance. There are marked differences, however. Firstly, it might simply not be possible to get insurance for the contemplated transaction, either owing to the nature of the transaction or the nature or identity of the parties.
Further, with insurance policies and bonds the premium must be paid, come what may. This can add unwelcome costs to a transaction, which can increase as the risks of the transactions increase - the cost of an insurance policy is tied to the risks in the transaction, whereas the cost of an escrow account is usually tied to the value of the transaction.
Finally, making a claim under an insurance policy or bond can take considerable time and it may be that, owing to the specific wording of the policy and the challenges in imagining absolutely everything that could happen, the policy or bond doesn't in fact cover the emergent circumstances, meaning the attempts at security can be frustrated.
In most escrow arrangements, by contrast, the money is available for immediate payout, and without the need to make complicated claims, include loss adjusters or enter into discussions about whether the policy wording permits a claim.
Using an escrow agent offers several notable advantages, including providing additional trust and allowing property and asset transactions to take place over time. Firstly, it enhances trust between the parties involved. They serve as an independent third party intermediary, which is particularly beneficial when the buyer and seller do not have an established relationship or in circumstances where trust may be an issue (say, for example, if they are transacting from opposite sides of the globe and materials will need to travel a long way over a period of time). This neutrality ensures that both parties can be confident that their counterpart will fulfil all of the requisite contractual obligations before the money in the escrow account is released.
Secondly, by securely holding assets until all agreed-upon conditions are met, the escrow service provides protection against fraud and reduces the likelihood of any party reneging on the deal. This secure handling of money or property titles minimises the risk of loss or theft, offering peace of mind to both parties.
The primary weakness of escrow services include the fees and the speed. Using an escrow service will ordinarily entail fees, which can be significant depending on the size and complexity of the transaction.
In addition to this, getting an escrow agent to act and hold funds can add extra steps, which can slow down proceedings, particularly if the agent requires extensive verification or documentation before releasing the money from the bank.
The use of third-party escrow services presents several opportunities to parties who ordinarily rely on insurance policies or bonds to manage risk, or who have not previously enjoyed the security and transparency that escrow account providers offer.
In addition to holding money in the bank and managing risks, escrow providers will also routinely carry out compliance (know-your-client / anti-money laundering) and monitoring checks on the parties to an arrangement, offering further comfort and information to the parties.
Many believe that alternative solutions such as smart contracts and online escrow platforms will challenge the future viability of traditional 'manual' escrow services. In our experience in the UK, however, parties to high-value transactions or those being carried out over a protracted period welcome the ability to be able to speak with their escrow agent regularly, often meeting face-to-face. The need for personal involvement in these transactions means that converts will almost certainly use third-party escrow services that they know.
Peer-to-peer and digital escrow platforms, especially those built on anonymous blockchain technology, while potentially offering lower cost, also offer lower contact and without that vital ability to just 'pick up the phone' to whoever is managing the escrow account.
There is also the possibility of the regulatory landscape for escrow providers changing. While increasing the regulatory burden would likely be welcomed by the incumbent escrow providers (most of whom are lawyers or other regulated financial institutions anyway), it would mean additional cost to would-be escrow service providers, and to do so might serve to narrow the market and reduce the number of options available to would-be escrow clients.
As global commerce expands and the volume of transactions between different nations, cultures and geographies increases, it is anticipated that the need to use escrow services will only continue to increase.
Setting up an escrow account in the UK is a really straightforward thing to do. It involves simply getting a quote, entering into the escrow agreement, and then depositing the required funds to be held for the term of the arrangements. Once the conditions are met, the escrow agent will pay over those funds to the receiving party and the purpose of the escrow will be complete.
An escrow agreement (the contract that sets up an escrow) is usually a tri-partite agreement (with three parties - the buyer, the seller and the escrow agent), which sets out the agreed terms on which the escrow agent will hold funds for the buyer, and on what conditions they will release the funds to the seller.
The primary areas for negotiation will be:
It is vitally important that the escrow funds are held solely for the purposes of the transaction. Participants will wish to ensure that the funds are segregated (kept separate) from the escrow agent's own funds; that they are safeguarded (not used by whichever bank is holding them for its own investment purposes, but simply kept in cash awaiting payment to the seller) and that in case of the escrow agent's own insolvency they remain available for the transaction. The terms of the escrow agreement will often provide for exactly what banking and payment arrangements must be used.
For peace of mind, all of the escrow funds we hold are kept segregated and safeguarded for the term of the escrow arrangements in an escrow account in the parties' own names at the Bank of England.
dospay is a trading name of DOS & Co. Ltd, a company registered in England and Wales with company number 08294966.
DOS & Co. Ltd. is registered with the Financial Conduct Authority under the Payment Services Regulations 2017 (FRN: 833374) for the provision of payment services.
All of our escrow and third-party managed accounts are segregated and safeguarded at the Bank of England.
