Atkinson: SRA’s analysis lacks evidence
Restricting or banning law firms from holding client money would be “unwarranted” and “undoubtedly have a huge adverse impact on the reputation of the profession”, the Law Society has warned.
In a strongly worded response to the trio of consumer protection consultations issued by the Solicitors Regulation Authority (SRA) in November, the society also opposed changing the way Compensation Fund contributions were split between law firms and individuals, so the proportion paid by firms increased from half to 70%.
“Prohibiting or restricting the holding of client money would have enormous ramifications for the provision of a whole range of legal services, including conveyancing, probate, litigation, and company commercial transactions,” it said.
“For instance, in just one area, like conveyancing, significant difficulties would be caused in the synchronisation of chain transactions, without a client account.
“The disruption and the potential unintended consequences of the proposals are likely to be disproportionate to any benefits.”
Law Society said its members remained “strongly against any change to client accounts”. The five largest local law societies, the ‘Joint V’, strongly condemned the plans earlier this week.
The consultations cover how client money is held, protecting client money and changes to the Compensation Fund. The society described many of the suggested changes as “unjustified and disproportionate”.
There were “several serious practical difficulties” with law firms moving from client accounts to third-party managed accounts (TPMAs), as proposed by the SRA.
“TPMAs do not eliminate the risk of fraud or cybercrime nor relieve solicitors of their AML [anti-money laundering] obligations,” the society argued.
It also opposed the introduction of “prescriptive” time limits for the return of clients’ residual balances – 12 weeks is proposed – saying the existing provision in the accounts rules of returning money ‘promptly’ was adequate.
It warned that removing the ability for law firms to earn interest on client accounts “could potentially increase the cost of services and this in turn may impact access to justice”.
The society said it had “considerable concerns” about using interest on solicitors’ client accounts as an alternative source of public funding for cases and there was “no evidence” that consumers would be happy about it.
On protecting client money, the society said it opposed a suggestion that firms could appoint external compliance officers, and that reporting accountants should be changed periodically.
But it backed the reintroduction of a mandatory accountant’s report for all firms holding client money.
With the collapse of Axiom Ince in mind, the society argued that there should be “greater monitoring and supervision of accumulator firms” and “scrutiny of non-legal personnel connected to law firms”.
On the Compensation Fund, the society said the proposed 70/30 split between firms and solicitors “would place too much burden on the largest firms”, which were among the least likely to give rise to claims on it.
It rejected a further proposal that contribution levels could be linked to the size or risk profile of law firms, saying none of the options offered “clear advantages over the current arrangements, so the status quo should be preserved”.
However, the Law Society did support removing the exemption on contributions for law firms which did not hold client money and replacing it with a discounted rate.
The society called for the removal of the £5m cap on connected claims, which the SRA has waived for claims related to Axiom Ince – a decision the society supported.
“Waiving the cap would not have been necessary if it had not been introduced in the first place and may not have been necessary if the SRA had a properly justified empirical basis for the level at which any cap was set.”
The response added: “The rise in costs due to a surge in interventions led to an unwelcome and abrupt increase in Compensation Fund contributions in 2024.
“The profession expects the SRA to take steps to prevent a recurrence. Given that interventions can arise unexpectedly following periods of relatively low incidence, the SRA should consider strategies for better managing these costs in the future.”
Law Society president Richard Atkinson commented: “Our members remain strongly opposed to any changes to client accounts, which have been used for decades by law firms with millions of successful transactions conducted each year.
“Removing client accounts may have huge ramifications for the quality of legal services including higher costs, delays and reduced access to justice.”
Mr Atkinson said the SRA’s “analysis of the perceived problems lacks evidence to support the radical reforms that the consultation proposes, and the changes suggested fail to address key practical difficulties”.
He added: “The existing arrangements for the Compensation Fund, imperfect as they may be, should be maintained until the SRA has properly considered the alternatives and has evidence to demonstrate that they would be better than the status quo.”
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