City solicitors: SRA should return to first principles
The Solicitors Regulation Authority’s (SRA) plans to reform consumer protection arrangements demonstrate its instinct to “overregulate” the profession, City solicitors have claimed.
The City of London Law Society (CLLS) said there was a consistent theme of the regulator “proposing additional regulatory burdens on firms where there are already provisions in the SRA regulatory arrangements to deal with the situation that is of concern”.
This approach was also “inconsistent with the government’s view that overregulation inhibits economic growth”.
“Given the contribution that the legal professional has already made to economic growth, this is a concerning approach.”
The CLLS was responding to the SRA’s three consultations – covering the model of holding client money, protecting client money and changes to the Compensation Fund – and criticised it for justifying many of its proposals by reference to anecdotal evidence.
The arrangements to protect client money “remained stuck in the 1940s”, regulating everyone in the same way under the same scheme, it went on.
The SRA “should return to first principles” and ask itself what a scheme to protect client money should look like in the 21st century.
While an individual client who has entrusted funds to a solicitor in order to complete a transaction “should expect and receive complete protection”, there were other scenarios that currently fell within the scheme that should be reconsidered, such as money paid to solicitors on account of fees.
“It is not clear why in contrast to any other profession or businesses a client of a solicitor has protections beyond those provided for in general law relating to debts and insolvency.”
The SRA’s concern that the current rule gave firms too much flexibility to put their own interests ahead of that of their client was already addressed extensively in the codes of conduct by requirements on acting in the client’s best interests and not taking advantage of them.
“The logic of the SRA’s position is that every such risk should be addressed by a specific rule so as to eliminate the ‘opportunity’ for a breach. This again demonstrates an instinct by the SRA to overregulate the profession and is inconsistent with its statutory obligations.”
The response cast significant doubt over the SRA’s long-term desire to replace client accounts with third-party managed accounts (TPMAs), saying the CLLS was “not convinced… [it] would lead to the regulatory nirvana that the SRA has suggested”.
Billions of pounds passed through client accounts each year because solicitors were trusted to give effect to transactions. “It may be that in due course the market finds a different or better way of dealing with such transactions which require a central trust element particularly as technology advances.
“However, there is currently no realistic alternative. It would also follow that a regulator seeking to deconstruct such an enormous element of commercial life and therefore push against market forces is heading down the wrong path and risks disrupting the market, undermining economic growth and weakening the economic significance of those whom it regulates.”
With TPMAs, solicitors would essentially be sub-contracting out the running of their client account. “However, the existing fiduciary obligations would remain and as such the risk profile and costs associated with that risk including insurance will continue.”
The CLLS questioned the absence of any discussion about the SRA’s intervention power, saying it was no longer fit for purpose.
“First, it conflicts with the insolvency regime which means that it acts as an impediment to firms being dealt with through the insolvency process. Second it is not apt for dealing with larger firms.
“Indeed, the Legal Services Board’s report into Axiom Ince makes clear that the cumbersome nature of the current power inhibited the SRA from acting earlier.”
It added: “More generally the SRA must be mindful that additional processes inherently inhibit the operation of the market. Where firms are seeking to merge or attract external investment, the SRA’s processes add uncertainty and delay.”
While both the five largest regional law societies and the national Law Society also strongly criticised the proposals and particularly the idea of scrapping client account, the Legal Services Consumer Panel urged the regulator to get on with it.
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