Client money and how it is managed is fast becoming one of the biggest debates of the legal world in 2024. In July the deadline passed to respond to the Solicitors Regulation Authority’s (SRA) Consumer Protection Review - a review that could cause seismic shifts to the legal profession. Having sought input from the legal sector, the SRA is now being watched carefully as it considers the steps that could be taken to further protect consumers of legal services.
It’s clear that the SRA is continuing to take a tough line on any firms found to be in breach of the rules, with news of fines being handed out regularly in the legal press – such as a firm fined for conduct that ‘involved breaches of principles and rules which were designed to mitigate misuse of the client account and encourage and protect the trust in the profession.’
A key focus of the review is to improve client money management practices to ensure greater protection of consumer finances following high profile cases such as Axiom Ince, where £60 million of client money being handled by the firm disappeared. With the SRA considering measures that include restricting firms from managing client accounts all together, the conversation has grown rapidly around the critical role that trust, reputation and security plays in the legal sector.
Whether intentional misconduct or innocent error, the number of interventions the SRA has undertaken has doubled over the past year. With law firms handling highly sensitive information and large sums of money for clients, while working across multiple jurisdictions with multiple parties, it’s easy to see how these significant levels of complexity create risk.
Whilst the SRA prepares to announce their findings later this year, the narrative is very much alive in the industry, with polarising views on what could and should happen as a result of the review. In this blog, we’ve gathered the news and updates, key thought leadership and commentary on this over the last six months.
Does the sector need a shake up?
An opinion piece from the SRA’s Chief Executive, asks whether a ‘client money big bang’ is needed to shake up the traditional way of managing client funds, comparing it to the huge changes that had to happen almost overnight in the workplace during the pandemic and which demonstrated that it was possible, and indeed more efficient in many ways, to do things differently. Paul Philip states that ‘firms holding client money is well established, but it is not inevitable’ and highlights the opportunities that digital banking brings to ‘introduce more sophisticated and robust systems, suitable for tackling increasingly complex challenges around issues such as cybercrime and money laundering.’
The opinion piece points out that although ‘escrow accounts are a feature of financial transactions in different sectors and jurisdictions’, the use of TPMAs, a type of escrow account, is low. Firms have told the SRA they are worried about costs, slowing transactions down and eroding service to clients. However Paul Philip says ‘to focus on the downsides risks inertia’.
The SRA is clearly considering different options, to ‘significantly increase checks and balances for firms involved in riskier areas of work’ or ‘mandate that firms can only hold client money if they provide greater reassurance around the robustness of their processes’. A blanket ban on client accounts is far from the only choice - but it remains firmly in the mix.
The SRA has been speaking to hundreds of solicitors from firms of all sizes to get their views, as well as members of the public and consumer groups.
In the webinar hosted by Legal Futures back in May, the SRA’s Chief Executive pointed out that ‘law firms did not hold client money in other countries.’ Traditionally, in the UK ‘people say that it is part of the identity of a solicitor to hold client funds, that it’s convenient and the clients expect it.’ But if law firms couldn’t hold client funds, ‘the cost of regulation would drop like a stone.’
He also claimed ‘the risk of falling trust in the profession from mishandling client funds would simply just go away’. Philip admitted ‘the [third-party managed accounts] market does need to develop’ but he felt this was a realistic aim in the medium term.
The issue of earning interest on client accounts was also raised with Philip saying ‘the money belongs to the client and actually you’ve got to ask yourself whether or not it’s really appropriate to be making profit from other people’s money.’
Bold decisions may be required
Tom Hayhoe, chair of the Legal Services Consumer Panel has argued for the SRA to be ‘bolder’ in its approach to third-party managed accounts (TPMAs) in another article published in early July.
In Hayhoe’s response to the SRA’s consumer protection discussion paper he claimed the panel ‘agrees with all the arguments for TPMA’ and was ‘convinced that TPMAs will eliminate or drastically reduce the occurrence of theft’. However, ‘certain principles’ must be adhered to which included ‘independence of the third party from the transacting party and transparency of status and ownership of the third party, which must be regulated by the Payment Services Regulator under the umbrella of the Financial Conduct Authority.’
He felt TPMAs ‘need not be a one-size-fits-all approach for all types of firms or authorised persons’ and there could be ‘some form of risk assessment that identified which firms or practitioners should be precluded from holding clients’ money’.
Lawyers still trusted to hold money
However, the latest annual Legal Services Consumer Panel tracker survey that was published in July claimed that the majority of people are happy for their lawyers to hold on to their money. More than 90% of survey respondents reported they were confident that the legal services provider they used would keep their money safe. Lawyers and banks were equally trusted.
Trust in the legal professions is important and although the focus of the CPR is on how to ensure that client money held by lawyers is protected against loss, the review also provides an opportunity to consider the wider challenges of client money management such as AML and sanctions compliance, foreign exchange, bank verification, fraud prevention and cybersecurity. These are all highly complicated areas that will become only more so as fraud and regulation increases.
At one of our roundtables with several law firms in attendance, we discussed the single most important thing that firms can do to mitigate the risk of handling client monies is implementing proper internal controls and avoiding a single person having control over the client account. Cases such as the office manager who moved money from client accounts to firm accounts to keep the firm afloat would not be able to happen in those circumstances.
The Law Society president Nick Emmerson has pushed back on the SRA’s proposals to consider abolishing client accounts. The Law Society is concerned about this major change being based on a small number of cases where client money has not been protected.
‘The ability to handle client money is an important difference between solicitors as regulated professionals and unregulated services providers,’ said Emmerson. He also believes ‘client accounts are a fundamental tool for the efficient and effective delivery of many types of legal services.’
Emmerson also states ‘it is unsatisfactory that responses are required before the findings and any recommendations of the Legal Services Board (LSB) commissioned independent review into the SRA's regulatory actions in the lead-up to the collapse of Axiom Ince and the SSB Group.’
More information and data may be needed for informed decisions
Jayne Willetts from the Birmingham Law Society brings several notes of caution into the discussion. She says that the SRA’s paper that supports the review is ‘heavy on lofty ideals and objectives – but light on evidence.’ Willetts claims that ‘no data is provided as to the number of interventions’ or how this compares with previous years yet ‘the cost of these interventions, the type of firm involved and the reasons for the intervention would also be essential information.’
Willetts believes that ‘holding client money is a key element of the delivery of legal services’ as the ‘majority of legal work involves transactions and the transmission of client money through client accounts.’ She questions whether this is ‘another example of the SRA’s changing the rules for the majority because of the default of a tiny minority’?
Willetts also believes the SRA needs to focus much more closely upon improving its authorisation procedures, citing the fact that the SRA approved the expansion of Axiom Ince and other “accumulator” firms. She says that by considering these proposals, the SRA is ‘sending out the message that the profession cannot be trusted’ and therefore the review needs to be followed closely by law firms who must engage with it to protect their reputation and the future of the sector.
Engagement and awareness is key for a successful outcome
In an article published by Lexology, Jonathon Bray also calls for the legal sector to engage with the review. He says he initially assumed the SRA’s idea of banning client accounts was just a ‘headline grabbing tactic’ to draw attention to the review process but is now convinced that the regulator is seriously considering it.
Bray acknowledges the SRA’s argument that banning client accounts could minimise the risk of client fund misappropriation and the heavy compliance burdens for law firms, which, in turn, could dramatically reduce the number of regulatory interventions and claims on the Compensation Fund.
Bray attended a webinar where one law firm reported that using a TPMA has enabled them to focus ‘more on legal services rather than on financial administration’. Bray agrees that ‘TPMAs would be the obvious alternative to holding client money’ but questions whether they ‘also introduce new complexities such as:
This demonstrates a lack of understanding still evident within the profession on how TPMAs function and how the payment institutions providing them are regulated. Bray also notes that the TPMA market is not mature with only a handful of suppliers.
However Bray concludes that it is key for lawyers to engage with the review as ‘our collective input is crucial in shaping a regulatory framework that not only protects consumers but also supports the integrity and future of our profession’.
As part of Shieldpay’s conversations with the legal sector and the SRA, we’ve noted some key questions about using alternative solutions for handling client money, particularly third-party managed accounts (TPMAs) so we’ve addressed them in this blog. This includes:
Managing client funds is no longer as simple as keeping client monies separate from office monies. With increasingly complex anti-money laundering and criminal finance requirements, international sanctions, cybersecurity risks and regulatory actions, not to mention dealing with countless stakeholders in jurisdictions around the world, payments processes have become far more complex than they used to be.
Partnerships and collaboration are the future
Many law firms lack the in-house resource to fully manage the growing risk burden so partnering with tech and finance firms that can deliver security, transparency and speed for fund management will be key. There could also be targeted controls around client accounts and more controls on certain firms or business models. It’s also possible that the SRA might work with other regulators – such as the FCA – bringing even greater scrutiny of fund handling.
Partnering with financially regulated businesses could not only help firms stay ahead of the regulator but, crucially, will limit some of the potential for human error that this complexity brings and deliver enhanced services to clients.
In a sector like law, trust is paramount and the reputational damage that follows a security breach or fund mismanagement is far more punitive than financial loss or regulatory sanctions.
Law firms need to be trusted partners in some of the biggest decisions made by businesses and consumers alike. Technology will be the key to protecting firms, their clients, their reputations and their security.
We will all have to wait to see the full results of the CPR and the policies that follow.
However high-profile cases of the mismanagement of client funds combined with increasingly sophisticated financial fraud, has clearly set the SRA on a mission to put in place stricter measures when it comes to client money management.
From communicating with clients to adopting new processes amongst fee earners and accounts teams, forward-looking firms should engage in the discussions and begin to prepare for potential changes now, and embrace the positive opportunities they could bring.
We look forward to collaborating with the SRA and the legal community to enhance consumer protection and ensure ongoing co-creation of solutions for the industry.
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Shieldpay is the payments partner for the legal services, working with Top 200 law firms in the UK to support the secure management of client funds. To learn more about our Escrow, Paying Agent and Third-Party Managed Account services and how they simplify complex transactions, manage and protect high value funds, and solve compliance complexity, get in touch with us.