How Client Money is Handled

The Solicitors Regulation Authority (SRA) has for some time now become obsessed with making changes to the ways in which client accounts are held and managed by solicitors.  We reported back in May 2024 in our article “It’s time to be afraid, very afraid” of their plans to abolish client account and replace them with some form of escrow account or Third Party Managed Accounts (TPMA). The latest consultation “Client money in legal services – safeguarding consumers and providing redress” shows that this intention has not gone away and in fact forms part of their ongoing review of consumer protection arrangements in the legal sector.

The consultation is divided into three parts:

• Part 1: The model of solicitors holding client money deals with how, when and for how long law firms should hold client money (if at all), alternatives to operating a client account and if rules around interest earnt on client accounts, or how long firms can hold client money after the end of a case, need changing so they better serve client’s interest.
• Part 2: Protecting the client money that solicitors hold covers the controls, checks and balances that firms are obliged to have in place to protect money held in client accounts and also looks at accountants’ reports and dormant firms.
• Part 3: Delivering and paying for a sustainable compensation fund looks at the issues surrounding the compensation fund and in particular at how funding of the scheme should be split between law firms and individuals and also whether contributions should be varied according to considerations such as size of firm, areas of law or other risk factors. The consultation also explores questions around potential payment caps and whether certain types of claim should remain eligible.

Among the key issues explored in the consultation are:

• Whether in a digital age, and with feasible/credible alternatives becoming more available which may be better at safeguarding client’s money, in the longer term is it still necessary or desirable for firms to hold client money as widely as currently the case, or at all.
• If rules around interest earnt on client accounts, or how long firms can hold client money after the end of a case, need changing so they better serve client’s interest.
• If changes are needed in terms of the controls, checks and balances firms are obliged to have in place to protect money held in client accounts. This includes obligations regarding accountants’ reports and certain rules regarding control and oversight over client money.
• If changes are needed to how contributions toward the compensation fund are determined. For example, changing the 50/50 split between individuals and firms funding the scheme to a 70/30 ratio. Longer term it also asks questions such as whether contributions should be varied based on considerations such as size of firm, areas of law or other risk factors.

All firms are urged to engage with this consultation and to make their views known.  Part of the problem is that the SRA have convinced themselves that a move away from the holding of client money by solicitors will somehow be a magic panacea for the ills of the profession – even though many of their assertions simply do not hold water.  For example, Paul Philip has stated on several occasions that moving away from client accounts will help solve the problems of money laundering and resolve the “iniquity” of solicitors profiting from interest on the client funds that they hold.  The SRA take the view that solicitors earning interest on client accounts is difficult to justify and incentivises firms “to hold more client money, or to hold it for longer, than necessary”.

In reality, the proposals will simply make carrying out many legal services even more difficult, and at a time when many firms want the SRA to think again about the rule against using client account as a bank, is possibly badly timed.  The simple fact is that unless there is a major change in the availability and operation of TPMAs, and unless it can be shown that processes can be put in place which will not result in yet more work for solicitors, then the inevitable consequence is that costs will need to be increased in order to absorb the increased overheads created.  So, as with so many of these proposals, the public will be worse off.  What is more, unless a high degree of security is put in place, putting all funds into a limited number of TPMAs will simply create a single one-stop shop for fraudsters.

The SRA consultation is set to run for 14 weeks until 21 February 2025 and during that period the SRA have stated that they will be staging a series of events with the public, legal profession and wider stakeholders.

It is vital that firms make their opinions heard if this proposal is to result in anything that is sensible, measured and not simply a further drain on the already overtaxed resources of the average solicitors firm.   We will be producing further commentary on this proposal over the course of the coming month, but in the meantime please go to the SRA consultation.