SRA consultation on client money in legal services – Law Society response
The consultation
The regulatory body for solicitors, the SRA, is consulting on client money in legal services: safeguarding consumers and providing redress.
The consultation is in three parts:
- part one: the model of solicitors holding client money
- part two: protecting the client money that solicitors hold
- part three: delivering and paying for a sustainable compensation fund
The consultation follows a 2024 SRA discussion paper, which sought views on a range of consumer financial protections.
The discussion paper was launched following the intervention into the firm of Axiom Ince, but before the publication of an independent report commissioned by the Legal Services Board (LSB).
The LSB report published in October 2024 concluded the SRA acted “inadequately, ineffectively, and inefficiently” in its regulatory actions leading to the collapse of the firm.
The SRA’s analysis of perceived problems lacks evidence to support change in circumstances where existing rules and processes appear to be working well.
The consultation invites views on how risks could be reduced for consumers of legal services.
We identify a number of possible safeguards that could decrease the likelihood of situations like the collapse of Axiom Ince or the SSB Group reoccurring.
Part one: the model of solicitors holding client money
Part one of the consultation focuses on the current rules that enable firms to hold client money, such as:
- residual balances: the SRA proposes a prescriptive period for firms to return client money after a matter concludes
- interest: the SRA outlines three options for how interest earned on client accounts could be dealt with
- moving client money: the SRA outlines proposals in which firms can take money from client accounts
- payments on account: the SRA proposes setting potential limits on the amount of client money that can be held in advance of legal work being done
- restrictions on solicitors holding client money and moving to third party managed accounts (TPMAs) or the possibility of firms moving away from holding client accounts in the longer term
Part two: protecting the client money that solicitors hold
Part two looks at how the SRA might better identify issues of consumer protection where firms are holding client money, such as:
- improving its identification of potential issues
- monitoring and checks
- whether its current practices are creating unnecessary risks
Part three: delivering and paying for a sustainable compensation fund
Part three looks at changes the SRA could make to the Compensation Fund, including:
- changing the apportionment of contributions from the current 50% from individuals and 50% from firms to 70% from individuals and 30% from firms for 2025/26
- differential contribution levels for different firms
- alternative methods of setting differential contributions for firms
- moving away from the cap of £5 million for connected claims
- amending Compensation Fund rules to explicitly exclude specific types of claims
Our view
As the professional body for solicitors, we amplify the powerful collective voice of more than 200,000 solicitors, advocating on the issues you’ve told us matter most.
We have been listening to the concerns members have raised with us.
To inform our response, we consulted with a member working group and solicitors from our expert committees, including our:
- Regulatory Processes Committee
- Professional Indemnity Insurance Committee
- Professional Standards and Ethics Committee
Client accounts are a fundamental tool for the efficient and effective delivery of many types of legal services, which are operated for the substantial benefit of consumers.
The profession is highly trained and regulated and is trusted by the public to hold money.
Solicitors’ firms undertake millions of transactions for clients safely and successfully, through client accounts every year. It is only an exceptional few who abuse their position.
The protections afforded to consumers are comprehensive and are at greater levels than those which most of the proposals (if implemented) would deliver.
Instead, the improvements to SRA procedures regarding early identification of concerns, monitoring and supervision that we suggest would reduce risk to consumers and maintain the high reputation of the solicitor profession.
Throughout our response, we raise concerns about EDI issues both on the profession and on consumers were the proposals to be implemented.
The model of solicitors holding client money
Client accounts enable solicitors to address client needs promptly and efficiently.
The proposed regulatory changes – such as restricting solicitors from holding client money or not holding it at all – are disproportionate and lack evidence of necessity.
Our members overwhelming favour the retention of client accounts without restrictions, which are cheaper and more flexible than TPMAs.
Residual balances
A prescriptive timeframe is likely to cause difficulties in practice.
The current rule on residual balances being dealt with “promptly” as soon as there is no longer any proper reason to hold those funds is adequate.
We are not aware of any evidence that indicates law firms are deliberately retaining residual balances for inappropriate reasons.
This is not an area on which the SRA has provided guidance and this may be helpful.
A possible solution to help address concerns is that the SRA might consider a level of residual balance that may be donated without SRA authorisation.
Interest
Most firms comply with the SRA’s rules and no persuasive evidence to the contrary has been presented for a rule change.
Firms are not motivated to hold client money for longer than necessary, as this increases risk.
Under the SRA Accounts Rules, firms must pay clients a “fair” sum of interest unless an alternative agreement is reached with the client.
Where some firms can secure better interest rates by pooling client accounts, any retained interest can be taken into account to offset charges and reduce client costs.
Rules around transparency and safeguarding consumer interests already exist and, due to the likely temporary rise in interest rates, we see no reason for a change to the current rules.
SRA guidance along the lines of that issued by the Institute of Chartered Accountants in England and Wales, could be beneficial.
Moving client money
SRA Accounts Rule 2.3(c) on agreed fees should remain, as there are several benefits to clients.
It should be the consumer’s choice to have this payment option, as long as there is transparency and it is agreed in writing.
Payments on account
The SRA should not be involved in prescribing the level of advance fees requested by firms. This is a commercial decision for firms.
For contentious matters, this is covered by section 65 of the Solicitors Act 1974 and does not require enhancement.
Restrictions on solicitors holding client money or the possibility of firms moving away from holding client money
We outline the huge ramifications for the quality of legal services if firms’ ability to hold client money were removed.
Our full response outlines the consumer detriment in terms of higher costs, delays and restricting access to justice.
Protecting the client money that solicitors hold
Drawing on practitioner knowledge, we make several helpful suggestions on the SRA’s proposals including:
- the reintroduction of a mandatory accountant’s report submission for all firms holding client money
- improvements to the SRA’s authorisation processes
- greater monitoring and scrutiny of non-legal personnel connected to law firms
- what information the SRA may seek in advance of any proposed changes within firms to help mitigate risks
- any SRA support package for compliance officers could include training to keep up to date with latest developments, regulatory changes and industry best practice on areas such as:
- conducting internal audits
- monitoring compliance
- reporting findings
We do not support the proposal for the appointment of external compliance officers for legal practice (COLPs) or compliance officers for finance and administration (COFAs).
The current rules rightly require COLPs and COFAs to have appropriate status and seniority within the firm.
We also do not support the changing or rotation of reporting accountants.
Firms may find it difficult to find alternative accountants. Even if this were possible, it will unnecessarily add to costs.
The SRA should review guidance to reporting accountants to make sure the investigations they carry out are sufficiently rigorous.
The SRA’s power to intervene into law firms is substantial and can cause considerable disruption, with significant negative consequences for clients.
We would support a less invasive tool being used to monitor a firm’s client account, should reasonable concerns exist, where a full SRA investigation is not in the public interest.
Delivering and paying for a sustainable compensation fund
The apportionment of Compensation Fund contributions of 50% from individuals and 50% from firms should be maintained, unless and until the SRA has a well-evidenced, better alternative.
We cast doubt on the SRA’s ability to fairly and effectively implement any system of differential contributions from firms. The existing flat rate of firm contributions should be maintained.
We agree the £5 million cap on connected claims should be removed, and suggest the SRA should return to the arrangements that existed before the 2020 consultation on changes to the Compensation Fund.
What this means for solicitors
If implemented, the SRA’s proposed regulatory changes would have huge ramifications on how legal services are delivered, with the likely impact of increasing costs for clients and harming access to justice.
Client accounts and the Compensation Fund differentiate solicitors from many other professional services and unregulated service providers.
Restricting law firms’ ability to hold client funds would adversely affect the range and quality of services provided to the public, causing a negative impact on consumers (including delays and increased legal costs).
Prohibiting or restricting the holding of client money would disrupt the provision of a whole range of legal services, including:
- conveyancing
- probate
- litigation
- company commercial transactions
Firms need to have control of money going in and out of their accounts to ensure that:
- funds are received from where they are expected
- funds are the correct amount, and
- they are able to send funds out in a timely manner, pursuant to any undertaking or other legal or regulatory requirement
The SRA suggests costs of professional indemnity insurance (PII) and contributions to the Compensation Fund would be reduced by firms not holding client money. However, no evidence has been provided to back this assertion.
PII premiums are driven by the type of work, negligence matters that arise and claims history, nor by the holding of client funds
The disruption and potential unintended consequences of the proposals are likely to be disproportionate to any benefits.
Where some firms can secure better interest rates by pooling client accounts, any retained interest can be taken into account to offset charges and reduce client costs.
Removing the ability to earn interest could potentially increase the cost of legal services and, in turn, impact access to justice.
The proposals for differential contributions to the Compensation Fund have significant drawbacks and would likely result in increased costs for firms, with greater burdens falling on smaller firms.
Differential contributions may pressure firms to turn down work in higher risk areas of practice or higher value transactions to avoid having to make increased contributions, with serious negative effects for firms’ profitability and access to justice.
Had the SRA chosen to enforce the £5 million cap on connected claims in relation to the collapse of Axiom Ince, solicitors would have been spared tens of millions of pounds in additional contributions to the fund.
However this would have been at the cost of the firm’s clients and the reputation of the profession.
The SRA should exercise its discretion on a case-by-case basis, rather than imposing arbitrary, unevidenced fixed limits on grants for connected claims.
Next steps
The consultation closes on Friday 21 February 2025.
Read the full consultation on the SRA website:
- part one: the model of solicitors holding client money consultation
- part two: protecting the client money that solicitors hold consultation
- part three: delivering and paying for a sustainable compensation fund consultation
The SRA will consider responses to its consultation. If it decides to move forward with any of the proposals, it will have to seek the approval of the LSB as the oversight regulator.
If and when it does so, the Law Society as the professional body for solicitors will respond appropriately.