Posted by Robert Blech, a professional practices partner at Legal Futures Associate MHA
Blech: TPMAs will not end fraud
In the fallout from Axiom Ince and other high-profile law firm failures, the Solicitors Regulation Authority (SRA) began talking about the possibility of introducing an alternative system to holding client money, most recently in the consumer protection review.
Although there is obviously a risk in holding client money, it is not the concept itself that can lead to fraudulent behaviour but the individuals who supervise it.
From our experience as reporting accountants, the majority of solicitors and law firms use client accounts and abide by the accounts rules in the appropriate way – solicitors are professionals and should act with integrity as well as in the best interests of the client.
Use of a client account is part of the relationship of trust between a solicitor and their client. If there are doubts as to whether a solicitor can be trusted holding client money, how does this impact on the standards of work and advice they are to give?
It is true that there are countries (such as France) with systems where law firms don’t hold client money, but these have been in existence for some time, and it will be extremely difficult to introduce such a fundamental change across the board.
There are wider impacts to the consumer if client accounts are abolished as well. If money is held in third-party managed accounts (TPMAs) instead – the only alternative on the table at the moment – there may be delays in accessing funds when needed, as the law firms no longer have control over the monies.
This may be cause particular problems in conveyancing matters, where there are often strict deadlines on completions. If solicitors cannot release funds in time, they could face claims for failed transactions.
Further, there are logistical issues with TPMAs. There is currently only one major provider of such a service and practices will have to navigate the costs of operating such an account. Some may not be able to afford to use an external source to hold client monies and, ultimately, we may see the cost transferred onto the consumer.
The SRA first gave the green light to solicitors using TPMAs in rule 11 of the 2019 accounts rules. In the five and half years since, as a concept they have not really taken off in the way which the SRA perhaps anticipated. It would be interesting to look at why and whether it is because of some of the issues already identified above.
Finally, if TPMAs become widespread across the profession, will this actually mean that fraudulent behaviour by those small minority of solicitors will suddenly vanish?
It’s unlikely. Those who wish to commit fraud will usually find a way of doing so, and in fact as things stand there would be less external scrutiny as funds in a TPMA are not considered client money and therefore an accountant’s report is not currently required.
What the use of TPMAs does result in, however, is moving the regulation of these monies away from the SRA, in turn reducing the pressure on the compensation fund. There will therefore continue to be a debate as to the best ways to hold client money, but tightening procedures in the present accounts rules may be the short-term answer.
One thing is for certain, though: if the SRA decides that holding client money should come to an end, it will certainly not be able to do it any time soon.
Hi Robert
Full disclosure: I’m Head of Legal at Shieldpay which, I believe, you are referring to as the “only one major provider” of TPMAs.
While I can’t conceal the fact that we have an interest in the outcome of the consultation, I hope those that have read our response to the Discussion Paper and the Consultation will agree that we’ve been balanced in our response.
We want firms to engage with us because they want to know more about the benefits we can add to handling client money, rather than because a regulator tells them to. We provide TPMA services to a range of firms, some of which use us exclusively, and some of which run a TPMA in parallel with their client account for transactions over a certain value threshold, number of payees, or where they have concerns about breaching the banking facility rule, in particular.
I wanted to address some of the points you make in your article:
1. Fear of delays is one of the main arguments against TPMAs. While I can only speak to our solution, this shouldn’t be the case. Our TPMA functions in a very similar way to a client account and firms control when payments are made, not us. The only time we would intervene to prevent a payment from being made is where our transaction monitoring controls identify a particular risk of making the payment, or a payee fails a sanctions screening check. We have customers successfully using our TPMA solution for a range of matters, including conveyancing. In our response to the consultation, we made the point that law firms do not need to ‘hold’ client money to effectively ‘control’ it.
2. While we are one of the leading providers of TPMAs, having offered them since they were first introduced, there are some other providers on the market, and we know that there are several others waiting for a cue from the SRA before entering the TPMA market in a meaningful way. As such, concentration risk should reduce. We think market competition is a good thing, but it’s not going to happen overnight as you say.
3. On