In November 2024, the SRA published a new consultation entitled “Client money in legal services – safeguarding consumers and providing redress: The model of solicitors holding client money” on possible changes to how and when law firms handle client money, how this money can be better protected, and future arrangements for the Compensation Fund. This consultation follows the publication in June 2024 of warning notices to law firms on mergers and acquisitions and what to do when money is missing from client accounts. New proposals within the consultation have been drawn from feedback from the SRA’s Consumer Protection Review. Paul Philip, SRA Chief Executive, said, “What we heard has confirmed that safeguarding consumer’s money must be the priority. There was also widespread support for the vital role played by the SRA Compensation Fund, while identifying questions about how the scheme should be funded in the future and how we can make sure of its overall sustainability”. The new consultation is one part of a wider programme of work to protect legal services consumers in the UK.
Why Is The SRA Consulting On Client Money Handling?
The SRA holds the view that the existing handling of client money rules has generally worked well to protect consumers but that the legal landscape in the UK is changing. They point to the increase in the need to intervene in client money breaches, including with Axiom Ince, where the impact on consumers is vast. The consultation is designed to ensure that new and emerging risks within the legal sector are identified and the necessary measures to protect consumers are implemented.
The SRA is looking at:
- Measures to avoid the possibility of consumers suffering harm in the first place. The SRA suggests that this may be achieved by improving their monitoring processes or tightening up our rules around firms holding client money.
- The use of the SRA’s Compensation Fund to reimburse consumers for losses when money has gone missing and whether this will be affordable in the long term in the context of ever-increasing risks.
What Is The SRA Consulting On?
The new SRA consultation on client money handling is split into three parts, as follows:
1) How And When Law Firms Should Hold Client Funds
The SRA is looking, in particular, at alternative ways to maintain a client account and whether the current regulations on interest earned from client accounts need changing. They are also looking at changes to the duration for holding client money after the conclusion of a case to better align with the best interests of clients.
2) Safeguarding Client Funds Held By Solicitors.
Here, the SRA considers the safeguards that law firms are legally required to implement to protect client money. This includes looking at the controls, checks, and balances, as well as the process for preparing accountants’ reports, including submission deadlines to regulators. Additionally, it considers the handling of dormant firms.
3) How Compensation Fund Contributions Are Divided Between Law Firms And Individual Solicitors.
This part of the consultation also considers whether contributions should be adjusted over time, taking factors such as firm size, legal specialities, and other risk elements into account. For instance, it explores the possibility of altering the current 50/50 split between individual solicitors and firms to a 70/30 distribution. It also raises questions about potential payment caps and whether certain types of claims should remain eligible for compensation.
When Does The Handling Of Client Funds Consultation End?
The new consultation runs for 14 weeks until 21st February 2025. Further work is expected in 2025 in response to the Consumer Protection Review, including:
- Reviewing and implementing changes to the SRA’s internal processes on how they handle investigations and interventions.
- Improving how the SRA uses data about law firms and complaints to spot patterns, including by increasing investment in technology and resource in this area.
Final Words
The new consultation by the SRA into the use and handling of client money is part of a much wider effort by the regulator to protect legal services consumers in light of recent large-scale law firm failures. We will update you once the feedback has been collated and published by the SRA in early 2025.
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