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The future of holding client money

Posted by Robert Blech, a professional practices partner at Legal Futures Associate MHA [1]

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.