Client money: Best off held by someone else?
The Solicitors Regulation Authority (SRA) has dropped its biggest hint so far that it could initially restrict and ultimately end solicitors holding client money.
Chief executive Paul Philip also said it did “not feel right” for solicitors to profit from interest on client money.
Writing for Legal Futures today, following our webinar last month on the issue, he said firms holding client money was “well established, but it is not inevitable”.
He explained: “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 were also models in other jurisdictions where firms do not hold client money. 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,” Mr Philip noted.
During the webinar, he said that the cost of regulation would “drop like a stone” if solicitors were not allowed to hold client money.
While stressing in his blog that no decisions have been made as it continues its consumer protection review, Mr Philip asks whether a ‘big bang’ would be better than a “gentle nudges”, predicting that the financial markets would respond rapidly to expand the currently limited alternative of escrow accounts if called on.
He added: “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.”
On client money, he said: “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.”
There are already regulations in place which means Solicitors can only hold certain amounts for a certain amount of time before being liable to the Client for interest… should they receive the general accumulated interest? YES.