Legal News – The Solicitors Regulation Authority (SRA) has said that legal firms shouldnt profit from holding money on their clients’ behalf and as such it is considering whether to change its rules to prevent firms retaining any interest earned on client money.
The Solicitors Regulation Authority has launched a wide-ranging consultation on consumer protection and in research carried out earlier this year, part of which the SRA has said that it had not received any compelling evidence of how firms retaining any interest on client monies, is in the consumer’s best interest.
According to the SRA accounts rules, legal firms are required to pay their clients a ‘fair’ sum of any interest earned on client monies, but there is no definition as to what ‘fair’ means in practice.
Members of the public told researchers that they considered a ‘fair sum’ meant receiving all of the interest that their money earned, but they would consider allowing interest to be used to reduce legal fees.
In its most recent financial benchmarking survey, the Law Society estimated that firms could have made as much as £27m total net income in interest on client money in 2022/2023.
The SRA said legal firms had reported to them, that by retaining some of the interest earned on client money, they can keep costs down and improve affordability and therefore access to legal services.
Some smaller legal firms told the SRA they relied on interest from client funds to remain viable or retain staff, especially in price-competitive areas such as conveyancing, which has seen a dramatic collapse inactivity since the Liz Truss mini budget of September 2022.
The Solicitors Regulation Authority (SRA) has also said that larger firms had also reported to it that they had increased profits because of client interest.
“We are concerned that, particularly with large sums of money, the potential financial benefit may be driving behaviours that are not in the interest of clients,” says the SRA consultation.
“And we do not think it is appropriate for firms to continue to profit from holding money on behalf of clients. We consider that 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 is fairer to individual clients, more transparent and arguably would better promote effective competition.”
The SRA’s impact assessment acknowledged that smaller firms may be affected by cutting off the interest income stream but that the proposal should bring positive impacts for the effectiveness and accountability of the wider profession and increase the trust in the legal sector.
In the short term, the SRA has proposed that legal firms should ensure that no money held on behalf of clients to pay for legal fees, is transferred into the firm’s office account until it is ‘appropriate’ to do so.
There is concern that the current rules on transfers offer too much flexibility about when money can be moved to the office account and offer little protection to the client if the firm becomes insolvent, as the client’s money, if in the legal firms office account, would therefore not be in a ringfenced client account.
A longer-term Solicitors Regulation Authority project is to look at whether firms should be able to hold client money at all.
Scrapping the client account for a centrally-held deposit function is popular with most consumers and as in the case of such a centrally-held deposit function in use in France, it would reduce the need for a compensation fund.
The SRA said: ‘We want to consider the extent to which the number and type of TPMA providers may increase in the future and what other alternatives may look like.’
In response to the Solicitors Regulation Authority (SRA) saying that legal firms shouldnt profit from holding money on their clients’ behalf Law Society president Richard Atkinson said: “Firms should continue to be able to operate client accounts, as they are vital for the effective and efficient delivery of many legal services. There is a danger that radical change will add cost and delay for clients and simply transfer the same or even greater risk from the current client accounts system to any new one.”
Atkinson added: “Following the Legal Services Board’s decision to take enforcement action after its independent review into the SRA’s handling of the collapse of Axiom Ince, a key question that must be asked is how the SRA can improve its own monitoring and enforcement around these kinds of risks as part of its core regulatory function. Simply passing regulatory responsibility elsewhere is unlikely to be the answer.
‘We look forward to working with our members to develop our response to this important consultation.”
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