Guest post by Paul Philip, chief executive of the Solicitors Regulation Authority
Philip: Is tightening up the rules enough?
The saying ‘necessity is the mother of invention’ never seemed more apt than during the pandemic. Workplace practices that were being introduced incrementally – from hybrid working to paperless offices – suddenly became an overnight reality. It was the big bang, rather than the gentle nudge, that changed the status quo.
Last month I took part in a good debate, hosted by Legal Futures, about whether solicitors should continue to hold client money.
It was interesting to hear the approach of Bridge Law Solicitors. They don’t hold client money and instead use a third-party managed account (TPMA). It seemed to be working well for them, as they explained it was affordable, risks were effectively managed and transactions were smooth.
So, why are so few firms doing it? There are challenges, but ultimately the reason Bridge Law took this approach was because its regulator, the Bar Standards Board, does not allow the firms or individuals it regulates to hold client money.
It begs the question – what if the SRA looked to change the status quo by doing the same?
After all, a large proportion of the serious cases we deal with relate to issues with client accounts – whether that’s money going missing, reckless disregard for our rules or poor processes that open the door to money launderers.
Last year, we had to intervene to shut down more law firms than ever before. And recently we have seen more interventions into larger firms, most notably, in the case of Axiom Ince where more than £60m of client money went missing due to a suspected fraud.
That is why protections around client money is one of the main areas we are focusing on as part of our consumer protection review.
We already have lots of client account checks and balances in place. We are considering tightening these up, for instance, through stricter rules on residual balances.
We are also looking at whether it is ever appropriate for firms to benefit from interest on client money. Firms must pay a fair sum of interest to clients, but should firms be topping up their income through interest earned on client balances? That doesn’t feel right to me – it’s the client’s money after all.
Yet will tightening up our rules go far enough in terms of better protecting the public? Every chain is only as good as its weakest link, and years of enforcement work shows there are too many weak links.
Firms holding client money is well established, but it is not inevitable. The advent of digital banking brings opportunities to introduce more sophisticated and robust systems, suitable for tackling increasingly complex challenges around issues such as cybercrime and money laundering.
There are also models in other jurisdictions where firms don’t hold client money. For instance, in France, client money is handled through an organisation called CARPA. Each local law society has its own account and oversees monies going in and out, supported by central regulation to ensure consistency. The possibility of an individual stealing money is limited and money laundering risk is reduced.
Benefits of firms not running client accounts could include increased security, better anti-money laundering compliance, and less burdensome regulation, with its associated costs.
It could help reduce professional indemnity insurance premiums, or at least lessen the yearly contributions firms need to make to our compensation fund. Fewer issues with client account money would also bolster trust in legal services.
Escrow accounts are a feature of financial transactions in different sectors and jurisdictions. Our rules allow the use of TPMAs, a type of escrow account, but so far the numbers of firms using them is low and the market limited.
Any change would need time and a suitable glide path, although I think you would see the market move quickly if we changed our rules and demand increased for these services.
Such a change would not be without risk. Would a move away from firm’s holding client money result in more eggs sitting in one basket? Systems would likely be stronger, but a fraud, technical glitch or successful cyberattack, could risk causing widespread problems.
Firms have told us they are worried about the costs, slowing transactions down and eroding its service to clients. In conveyancing, speed is of the essence, with firms often completing multiple transactions every day.
However, to only focus on the downsides risks inertia. We need to explore ideas that could work in the public interest over the long term.
Even if it is too soon to place a blanket ban on firms directly holding client money, we are thinking through different options. We could significantly increase checks and balances for firms involved in riskier areas of work. Or we could mandate that firms can only hold client money if they provide greater reassurance around the robustness of their processes.
We have made no decisions yet. We are speaking to hundreds of solicitors from firms of all sizes to get their views, as well as members of the public and consumer groups.
You can still let us know your thoughts on this issue – and other ways we could improve our approach to consumer protection raised in our discussion paper – up until the 1 July. We will continue to consider views after then, ahead of consulting on proposals in the autumn.
Given the shifting risks in the sector, the question is whether gentle nudges will be enough – is it time now for a bigger bang?
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