When the Solicitors Regulation Authority (SRA) first floated the idea of banning solicitors from handling client money, I must admit, my initial reaction was sceptical. I assumed, perhaps naively, that this was just a headline-grabbing tactic to draw attention to the SRA discussion paper, that lacked any real substance.
However, after delving into the review, taking part in an SRA round table event, and attending the enlightening Legal Futures session on the future of regulation, my perspective has taken quite a turn.
I have come to the conclusion that they aren’t kidding about this. Although the proposals are at their earliest stage, I am convinced that if they had their way, the current SRA management would ban solicitors’ client accounts.
Initial Scepticism
On the face of it, the radical notion of stripping solicitors of the ability to handle client funds seems drastic and unrealistic. I think I used the word “bonkers” to describe the proposal to a client. Handling client money has been a cornerstone of solicitors’ daily practice, especially in areas like conveyancing, probate, and family law.
My initial reaction was to view the SRA’s proposal as a solution in search of a problem, inserted into the discussion paper to facilitate engagement from the profession, without much prospect of going any further.
They wouldn’t push this…would they?
Turning Point: The Legal Futures Session
My perspective changed during a session at the Legal Futures conference, titled “The Future of Regulation: Should Solicitors Continue to Hold Client Money?“.
The chief executive of the SRA argued that banning client accounts would drastically reduce the cost of regulation and compliance. It could minimise the risk of client fund misappropriation and the heavy compliance burdens currently borne by law firms, which, in turn, could dramatically reduce the number of regulatory interventions and claims on the Compensation Fund.
Firms that have started using third-party managed accounts (TPMAs) instead of holding client money directly shared their experiences in the session, highlighting both challenges and efficiencies. For example, one law firm noted that using a TPMA has not only proved to be secure but has also kept operational costs manageable, with no month exceeding £500 in TPMA fees. This shift has enabled them to focus more on legal services rather than on financial administration.
TPMAs would be the obvious alternative to holding client money.
However, there are practical considerations regarding the transition away from client accounts. Some argue that while TPMAs could reduce some risks, they also introduce new complexities such as how these profit-making third-party providers are regulated and whether they just represent a shift of risk to another regulator. Moreover, there is a concern about the impact on certain areas of transactional practice, where solicitors need to manage substantial client funds directly and within tight time frames to ensure deals complete.
It is also notable that the TPMA market has not developed since 2019 – there are less than a handful of suppliers providing the service.
The Legal Futures session came a day after a private SRA round table covering similar ground, involving compliance and legal professionals. Although there were several client protection suggestions put forward, there was surprisingly very little pushback to the regulator’s client account proposals.
The Rationale Behind Banning Client Accounts
The SRA discussion paper comes in the wake of the Axiom Ince, Metamorph, Kingly and SSB scandals, which have been extremely costly to PI insurers, the profession-funded Compensation Fund and the regulator’s reputation. The rationale behind the SRA proposals is grounded in more than just the usual compliance and risk management considerations. It is about fundamentally protecting the public’s trust in legal services by removing the possibility of rogue solicitors misappropriating funds.
By outsourcing the handling of client money to regulated third-party entities, the SRA suggests that solicitors would be able to focus more on their core legal work rather than on the burdens of compliance and financial management. They assume that this shift could potentially lead to a more competitive market landscape, where legal fees are driven down due to the reduced overhead costs.
Concluding Thoughts
Having reflected deeply on the discussions and the points raised in the Consumer Protection Review, I have reached the conclusion that banning client accounts is the regulator’s preferred direction of travel. Although they say that it is not a fait accompli, it is also not merely a regulatory whim. It is a considered proposal in response to recent high profile law firm failures and a Compensation Fund struggling under the volume of claims.
As solicitors, our primary duty is to serve the interests of our clients. Some will say that removing client money risks is worthy of consideration if it protects the public interest, maintains trust in the profession and reduces the cost of regulation.
I disagree wholeheartedly. Handling client money is a fundamental part of being a solicitor and, by extension, the English legal system. It allows transactions to be completed efficiently and without the additional cost and inconvenience of using third parties. Removing solicitors’ client accounts would reduce the value of using a regulated professional, and would give unregulated providers an unfair competitive advantage.
TPMAs have their place for firms that want to operate a lean outsourced model, and as the market develops so too will the product offerings. But they should not be forced upon the profession or public.
I encourage my fellow solicitors and legal professionals to engage with this discussion paper, review the SRA’s proposals, and participate in the ongoing consultations. Whether you agree with me or not, our collective input is crucial in shaping a regulatory framework that not only protects consumers but also supports the integrity and future of our profession.
The SRA discussion paper is open for submissions until 1 July 2024.
