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Following increasing regulatory concerns that some law firms utilise interest on client accounts and residual client account balances as a form of supplementary income, the Solicitors Regulation Authority (SRA) recently closed a major consultation on potential changes.
The profession could even see firms prohibited from holding client money – which would amount to one of the biggest restrictions in standard legal practice for decades. A catalyst for proposals for change was undoubtedly the regulatory intervention into Axiom Ince, when it transpired more than £60m was missing from client account.
However, it’s not yet known whether the SRA had decided what steps, if any, to take. It has conceded that if the decision is made to ban firms from holding client money in future, it will take “several years” to achieve (partly because of the lack of alternatives in an albeit limited market).
The 14-week 3-part consultation – described by the SRA as one of its “largest ever and most in-depth pre-consultation exercises” - ended in February. Each part of the consultation had a specific focus:
The principle of solicitors holding client money.
The mechanics of holding client money and potential changes that could be made to the system to bolster protections.
Should the compensation fund change to provide a better model for redress for both the profession and clients?
Among the issues under consideration include how, when and for how long firms should hold money (if at all) and potential alternatives; and how to better protect money held in client accounts.
A spokesperson for the SRA said: “The proposals and ideas we were consulting on were at different stages of development – we were very much looking to stimulate debate and generate intelligence to inform the way forward.”
A key concern of the SRA is that the existing ability for firms to generate income from the interest on client money serves as an incentive to hold client money for that purpose, rather than for the client.
According to the latest SRA figures, three in four regulated firms declared holding client money (as at 1 November 2023), around half of which held an average of under £100,000. And the number of firms closed down for suspected mishandling of client money has risen in recent years.
What’s next?
The SRA has confirmed receiving more than 400 written responses - a spokesperson called it “a really great response”. As well as the written responses, they gained a “wealth of insights… through the consultation period from a range of roundtables, focus group, research and wider engagement.”
He added that in some areas, the SRA is already taking action or working with the profession to consider, for example the regulator called in 600+ accountants’ reports earlier this year. There is also its ongoing review of how specific roles operate, and the work already under way post-Axiom.
“While in other areas,” the spokesperson said, “for example where we may consider changes to rules/requirements or changes that have a direct impact on firms, we are continuing to consider future approaches.” He added that the SRA hopes to run a further consultation on specifics toward the end of the year.
Firms will be watching and waiting to see whether the SRA will be minded to introduce rules preventing firms holding client money.
Find out more about the proposals, and alterations restricting firms’ use of interest on client account and more with our SRA CPD webinar bundle here.
