Paul Philip, chief executive of the Solicitors Regulation Authority (SRA) caused much debate last month when he announced that the cost of regulation would ‘drop like a stone’ if solicitors were not allowed to hold client money. This coincided with news that, increasingly, some law firms are turning to third party managed accounts (TPMA) providers to handle their client money, thus reducing or, in some cases, negating the need for accounts staff in law firms entirely.
In his address during webinar hosted by Legal Futures which was part of the SRA’s engagement activity in their Consumer Protection Review, Philip cited the fact some countries did not expect law firms to handle client money, adding that ‘(some) AML issues would dissolve overnight. The risk of falling trust in the profession from mishandling client funds would simply just go away… Not to mention the cost of PII no doubt going down radically.’
Leaving the AML point aside for now – that aspect warrants a longform article! The thinking is that this would ease the pressures on compliance teams, minimise client funds misappropriation thereby reducing the number of regulatory interventions along with one of the stated aims that the demarcation of client accounts is to help restore trust to profession. The Axiom Ince case of the missing £64M and other high-profile scandals in the legal world has brought the safety of client funds into sharp focus. Another recent case involves the conviction of a law firm probate manager who defrauded £634,000 from several charities and trusts. With the recent spate of high-profile cases of law firms or individuals in law firms misappropriating funds, it’s hard to argue with Philip’s concerns about the profession’s somewhat stained reputation in the eyes of the public.
That said, it’s an inescapable truism that wherever money is being held there is the potential for financial crime and with forethought crimes of appropriation can still be committed by motivated solicitors with criminal intent. At a more existential level, the trust placed in solicitors as a paragon of virtue has been intrinsically part of the profession’s DNA. Is it proportionate to tar the whole of the profession with the same brush due to the misdeeds of the few? Rather than restore trust in the profession, removal of solicitors’ client account could decimate the reputation of the entire profession.
Another potential difficulty is where the lines are drawn in respect of regulation. Certainly, it opens the possibility for increasingly complex jurisdictional issues between the regulators for solicitors and TPMA providers.
For most law firms, one of the most prescient elements of Philip’s claim is the reduction in costs, especially given the record levels of PII law firms are seeing. It’s fair to ask, would the immediate knock-on effect of client monies no longer being held on the books of a law firm be that they end up seeing a reduction in their indemnity premium? Or would any savings immediately be offset by the need to engage and pay for a TPMA? The more sceptical may say that there will in fact be no such reduction in the cost of regulation. On a more practical level, given there are limited options of TPMA providers,it is likely that any move of this magnitude would create huge demand without an adequate supply.
Given Philip admits that this, realistically, is more a medium-term development, it is hard to visualise how effective this would be without being able to assess the infrastructure which underpins it; would it reduce costs and burdens upon law firms or is it simply a matter of kicking the ‘liability can’ up the road to a 3rd party creating an additional level of complexity to financial dealings at law firms. Certainly, the need to liaise with yet another 3rd party provider is a further potential point of failure in any matter and will be a concern for conveyancers or any branch of law that requires quick transactional turnaround on client funds, to ensure deals are completed on-time.
If one was feeling uncharitable, it could be claimed that this is being hastily tabled as an overcorrection in the wake of the missing £64M – and whilst there are undeniably examples of misuse of client accounts, a tiny proportion of this is criminal in nature. Some commentators have mooted that greater education within law firms in accounts rules and more effective regulation might see appreciable improvements in this area overall without the need for such fundamental upheaval.
The deadline for responses to the SRA’s Consumer Protection Review is 1st July 2024. Have your say here.