Posted by Karen Edwards, head of professional development at Legal Futures Associate ILFM
Edwards: Opportunity to modernise operations
The recent consultation from the Solicitors Regulation Authority (SRA) on changes to handling client money has caused consternation across the legal profession, not least amongst our members at the Institute of Legal Finance & Management (ILFM).
By way of reminder, the consultation considers the fundamental question of whether law firms should continue holding client money, the rules surrounding interest on client accounts and the way this is managed.
The ILFM’s primary aim is to raise awareness, advocate good business practice, and maintain high standards to ensure that clients’ money and assets are protected and treated ethically, as well as protecting the law firms and their employees at the same time, so the consultation has had a big impact.
As part of the consultation, we collated responses from our members, and our findings have been presented directly to the SRA. So, what do our members think of the proposals?
Law firms holding client money
Perhaps the SRA’s most contentious proposal questions whether law firms should continue to hold client money at all. The regulator is exploring alternatives, particularly third-party managed accounts (TPMAs), which could fundamentally reshape how legal practices manage financial transactions.
Every single ILFM member who responded to the survey disagreed with the proposal to change the current model.
Responses mentioned the negative impact on client service levels, delayed transactions, the increased risk to client money being held by a few organisations as opposed to being spread across multiple banking institutions, and an increase in fees.
They also noted that millions of transactions are processed safely through client accounts each year, with only exceptional cases of abuse.
Members also commented that they have concerns over how much TPMAs (as an example alternative) charge for their service. In addition, there were concerns over where the risk sits with using such accounts; for example, who would ultimately be responsible for the funds and the payments sent/received?
The majority of our members who responded have no experience of using TPMAs, but those who had found them to be inefficient, unwieldy, and to have caused delays in transactions.
Residual balances and interest
The SRA is considering setting a 12-week deadline for returning residual balances within 12 weeks of the conclusion of a matter, replacing the current requirement to return funds ‘promptly’.
Where a firm does not have the necessary details to return the money to comply with this time period, a further 12 weeks could then be prescribed for tracing owners, and where this is not possible, firms would donate unclaimed funds to charity or apply to the SRA for approval if amounts exceed £500.
Some 70% of ILFM members who responded to our survey agreed that more prescriptive requirements for returning residual balances would be beneficial, but many also mentioned that defining when a matter is ‘completed’ would help, as this can vary depending on the work type.
Nearly two-thirds of respondents felt 12 weeks would be sufficient, though others thought timescales would vary again depending on the work type, and that 12 weeks may not be feasible to return a balance.
The regulator has also questioned whether firms should continue to retain interest earned, suggesting it may not always serve clients’ best interests and could incentivise firms to hold funds unnecessarily.
The majority of ILFM members were against this proposal, due to the potential impact on high-volume transactional work such as conveyancing, the impact on smaller firms and the potential increases in fees charged to clients.
Other impacts flagged by members included a lack of/no incentive for firms to negotiate higher rates of interest offered by some banks and therefore no incentive for the banks to pay higher rates. As a result, there would therefore be no benefit to either the firm or their clients and the only beneficiaries would be the banks themselves.
Furthermore, there is also the risk that clients might ask firms to retain funds for longer in order to earn more interest than they would if the money were in their own account, which risks breaching rule 3.3 (not to provide banking facilities).
Additional suggestions put forward by members included an equal split of interest between the firm and the client, as well as a potential minimum percentage of interest a firm should give to the client from the rate offered on the client account.
Our members also felt that there are circumstances where firms retaining some of the interest would be of benefit to the client.
The majority of our members who responded ‘Yes’ to this question said the biggest benefit to the client would be mitigation of increased fees, as the time and cost in administering all interest to all clients would increase.
Members also commented that some clients choose not to receive interest, as allowable under the current rules, and would expect this option to remain.
Requesting client money before work is completed
The SRA is also considering whether to set out how much money firms can request from clients prior to work being completed.
Our members commented that, as long as money being requested in advance (for fees and disbursements) is reasonable and not for the gain of the firm, there should be no requirement for the SRA to be more prescriptive.
Members also stated that it should be a matter for discussion between the client and the firm.
For example, in a litigation case, it might be impossible to accurately budget for costs, but as long as the client is made aware of the process in a client-care letter, requests may be staggered as the case progresses.
Conversely, members said that, in conveyancing matters, being prescriptive may be possible to cover costs such as Land Registry fees and other search fees associated with buying/selling a property.
Strengthening oversight and controls
To enhance client money protection, the SRA proposes the following options:
- Reintroducing mandatory submission of all accountants’ reports for non-exempt firms;
- Requiring reporting accountants to submit annual declarations;
- Introducing annual declarations for firms regarding their accountant’s reports; and
- Potentially requiring firms to periodically rotate their reporting accountants.
ILFM members were equally split between preferring the first two options, with fewer keen on option 3.
Half of respondents felt changing reporting accountant periodically would be unnecessary: it would increase costs (especially for smaller firms), while not every qualified accountant is experienced to undertake AR1 work.
Furthermore, it is useful to have reporting accountants who understand your business, but it is still important to safeguard that independence.
The other half of members thought it could be possible, although there were concerns over the lack of reporting accountants who have experience or knowledge of the SRA Accounts Rules.
Other concerns
When it came to the proposal to impose a rule that any manager who can unilaterally make decisions that impact client money handling should not also be allowed to hold a COLP or COFA role, our members raised concerns about the disproportionate impact this may have on smaller firms, if external compliance support becomes mandatory.
While they support more regular training for compliance officers, they question whether the SRA’s ‘one size fits all’ approach remains fit for purpose given the substantially different challenges faced by large corporate law firms compared to small practices.
Members also commented that no manager or any other individual should be able to unilaterally make decisions that impact client money handling in any case.
What’s next?
As the profession awaits the SRA’s decisions and next steps following the consultation, we recommend firms should prepare for potential changes to their financial management and compliance practices.
While these reforms may introduce challenges, they also present an opportunity to modernise operations and strengthen client confidence.
The consultation reflects a broader regulatory drive toward enhancing transparency and consumer trust in the legal profession, which the ILFM supports.
However, finding the right balance between consumer protection, operational efficiency, and proportionate regulation remains the central challenge for the SRA, as our members responses demonstrate.
Leave a Comment