By Legal Futures Assocaite dospay
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 provides a summary of escrow accounts and TPMAs, explaining their applications and how law firms interact with them in practice.
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. At dospay, we provide both on a white-glove basis, and can also assist with tailored/bespoke arrangements for complex or large-scale matters (from class-action-style litigation settlements to complex multi-tier construction project bank accounts).
