Banking: Some firms held more than £1bn in client account
Major changes to the way law firms hold client money, including not retaining interest and restricting the collection of fees in advance, were proposed yesterday by the Solicitors Regulation Authority (SRA).
As trailed at last week’s compliance officer conference, the consultation expresses an ambition to move away from holding client money entirely in the long term, once suitable alternatives have been developed, and introducing a specific period – 12 weeks – from the end of a matter to return funds.
The SRA’s most recent data, as of 1 November 2023, showed that around 7,000 firms (around 75% of all firms) declared that they held client money in the year to August 2023.
Some 4,500 firms held an average amount of less than £100,000, while a further 3,500 firms held more than £1m at some point during the year.
Around 80 held more than £100m at some point during the year, while a small number of firms each held more than £1bn.
The consultation on the model of solicitors holding client money is one of three the SRA has launched following its consumer protection review earlier this year.
It said research it undertook showed consumers felt that, as it was their money, they should receive any interest – as a minimum, the interest rates should reflect what they would have received in their own savings account.
“We heard that some firms used part of the interest to subsidise their operating costs and/or keep their fees down, or to improve their profitability. Some firms told us that they would not be able to remain in business without the money raised from interest on client accounts.
“Through our inspection and investigations work, we have seen examples of firms who are not returning client money promptly at the end of a case, leading to high residual balances. We have heard from some compliance experts that this is not always treated as a priority by firms and their employees.”
The consultation said there were currently “incentives on firms to hold client money which do not align with the best interests of clients”.
Rather, “it is likely to be in the client’s best interest to receive all the interest from their money, and for firms to reflect their true operating costs through the fees that they charge”. This would be subject to a de minimis figure.
“We are yet to hear compelling evidence of how firms retaining any interest is in the consumer’s interest,” it went on.
The SRA noted that, in Canada, France and Australia, interest was used to support pro bono services and legal education. It “could consider” whether to follow suit, but “it would mean that clients would not receive all the interest accrued on their money”.
The consultation asked whether it would be “reasonable and effective” to prescribe that any excess funds must be returned to the rightful owner within 12 weeks of the conclusion of a matter.
Where the firm did not have the necessary details to return the money, firms could have a further 12 weeks to make “all reasonable attempts to trace” them. Where this was not possible, they could either donate the money to charity or apply to the SRA to do so where the funds exceeded £500.
“We may also wish to set additional requirements on firms to ensure that they keep contact details up to date, maximising the chances of tracing clients or beneficiaries after a matter has concluded.”
The SRA would also emphasise to reporting accountants that the importance of compliance with these requirements when deciding whether or not to qualify their reports.
“We may also consider further monitoring, such as spot checks on firms,” the SRA said.
It is also looking to change rule 2.3(c) of the accounts rules, which allows the solicitor to agree an alternative arrangement to paying client money into client account.
“We are now concerned that maintaining rule 2.3(c) in its current form provides firms with too much flexibility to put their own interest ahead of that of their client. There are clear risks to clients where they enter into alternative arrangements.
“For example, if the client decides to terminate their retainer, the firm may not have money readily available to repay the money which the client paid to the firm. If the firm becomes insolvent, the client’s money would not be in a ringfenced client account. If the firm has to close suddenly due to the incapacity of a sole practitioner, those dealing with the closure may not be able to immediately repay the client.”
The SRA said it did not want to deter firms from offering fixed fees where the legal work was expected to last for a considerable period of time.
“However, we would like to explore if there are circumstances in which firms may be able to adapt their charging model, for example, by offering fixed fees with clear points agreed at which firms are able to transfer part of the fixed fee into their office account.”
It also intends to move forward with changes first proposed in December 2022 to make it clear that, where a firm has incurred expenses on behalf of a client – such as paid a Land Registry search fee from its own money – it does not need to deliver a bill or other written notification of costs before reimbursing itself from money held in a client account.
Finally, the regulator said it wanted to ensure that the amounts paid by clients in advance and then held in client accounts “are no greater than is needed to run the case”, amid reports that some firms take higher levels of advanced fees more often than they used to.
“We therefore want to explore whether we should be more prescriptive about how much money firms can request in advance of work being done and/or the point(s) at which money can be requested.
“For example, it may be reasonable for firms to request fees in advance that cover all the anticipated costs and disbursements for the legal service where a matter is expected to last for a relatively short time.
“However, where a matter is expected to last much longer, it may only be reasonable to request fees to cover the anticipated costs and disbursements which will be incurred at a particular stage, or to last for a defined period of time.”
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