“Time to act” on scrapping client accounts, consumer panel says

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Hayhoe: Resistance to change

Now is the time for the Solicitors Regulation Authority (SRA) to take “decisive steps” towards scrapping solicitors’ client accounts, the Legal Services Consumer Panel (LSCP) has said.

In a strongly worded response to the SRA’s trio of consumer protection consultations, which could lead to third-party managed accounts (TPMAs) replacing client accounts, panel chair Tom Hayhoe criticised the regulator for its “conservatism” and “resistance to change”.

Under the heading ‘Time to act’, Mr Hayhoe said: “We must emphasise that we have no confidence that the current framework and rules offer adequate consumer protection against the misappropriation of clients’ money.”

It was “difficult to accept” that the SRA was still developing its thinking in the area, given that it had consulted on client accounts five times since 2015.

“We appreciate that the legal profession has traditionally operated under established norms,” Mr Hayhoe said. “The SRA’s reluctance to press ahead with a convincing option/s toward TPMA appears to stem from a resistance to change.

“This conservatism not only hinders consumer protection, but could also stifle innovation within the sector, especially in an era where financial technology is rapidly evolving.

“Embracing TPMAs could modernise the handling of client funds and align legal services with contemporary financial practices.”

The panel’s view contrasts starkly with that of solicitors, with both the five largest local law societies and the national Law Society strongly against scrapping client account.

Mr Hayhoe said the consultation on the model of solicitors holding client money “disproportionately” focused on residual balances and interest, rather than the “central issue” of misappropriation.

The panel recommended the SRA take “decisive steps” toward gathering all the data and information needed to make an informed decision on TPMAs.

“The central issue is how to prevent solicitors from misappropriating clients’ money. The strongest proposal for addressing this is mandating TPMA and prohibiting law firms from holding client accounts or, at the very least, precluding high-risk firms from handling client money.

“As the SRA itself noted, the Bar Standards Board does not allow barristers to hold client money. Therefore, there is an existing evidence source on the risks and benefits of TMPA.

“Additionally, some firms already use TPMAs, giving the SRA insight into some of the questions it is posing on efficiency and timeliness.”

Mr Hayhoe said the “evidence-gathering work” should have been carried out before publication of the consultation.

On residual balances, he said the consultation did not propose “clear requirements” for informing clients on how they would be managed, nor did it explore alternative solutions, such as pooling residual balances to create a fund for access-to-justice initiatives.

On client account interest, the LSCP agreed that the SRA should introduce clear rules requiring law firms to “distribute interest to clients in proportion to the amount and duration of funds held”, unless the client explicitly agreed otherwise.

Responding to the consultation on the compensation fund, Mr Hayhoe said the panel believed the SRA should reconsider using it to finance interventions.

The fund was intended to “compensate victims of wrongdoing, not to fund core regulatory activities” and the rising cost of interventions was “a significant drain”.

While remaining neutral on the proposed 70/30 split between law firms and solicitors in contributions to the fund, instead of the current 50/50, the panel strongly advocated for “a move away from the current flat-rate contribution system, which fails to account for varying risk profiles among firms” in favour of a risk-based approach.

It also recommended removing the “arbitrary” £5m cap for connected claims, which “inadequately protects consumers in high-stakes legal matters”.

For the consultation on protecting client money, Mr Hayhoe said the panel strongly backed a “more prescriptive approach in requiring specific information from firms, particularly post-acquisition or during significant changes, to better mitigate risks”.

The panel recommended that the SRA take a “cautious approach”, favouring “pre-approval for all acquisitions due to the lack of assurance that the SRA has strengthened its monitoring and supervisory activities”.

The panel also backed re-introducing the requirement that all law firms submit an annual accountant’s report to the SRA.