Cost of regulation would “drop like a stone” with no client account


Charlton: Move away from client account ultimately inevitable

The cost of regulation would “drop like a stone” if solicitors were not allowed to hold client money, the chief executive of the Solicitors Regulation Authority (SRA) said yesterday.

Viewers of a Legal Futures webinar on this issue also heard from a firm that operates a third-party managed account (TPMA) and does not have any accounts staff as a result.

The hour-long webinar can be watched on our YouTube channel or below.

The discussion, held in association with the SRA, was part of the regulator’s engagement with the profession as part of its consumer protection review, which is currently at the discussion stage.

The kinds of changes it could make range from incremental improvements in the SRA’s processes to radical reform of the regulatory framework. The webinar discussed the latter.

Mr Philip explained that, in light of Axiom Ince and jump of around 250% in the number of interventions the SRA has conducted in the last couple of years, “we do have to ask ourselves whether the cost of providing compensation arrangements for clients is both affordable and proportionate for the profession”.

A lot of the practising certificate fee and all of the compensation fund fee “flow from firms holding client money”, he explained. “Every chain is only as good as its weakest link [and] there are unfortunately many, many weak links in the solicitors’ profession.”

Law firms did not hold client money in some other countries, he pointed out.

“People say the market is not mature enough, 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 you couldn’t hold client funds, the cost of regulation would drop like a stone.

“[Some] AML issues would dissolve overnight. The risk of falling trust in the profession from mishandling client funds would simply just go away. And that’s not to mention the cost of PII no doubt going down radically.

“I’m not here to say that it could happen overnight. The market does need to develop and the transaction costs need to be far more proportionate, but I have no doubt that over the medium term we could deliver a more mature market in third-party managed accounts – as they say in the movies, build it and they will come.”

Sarah Charlton, chief executive of South-West Wales firm Eaton-Evans & Morris, said that as long as the firm could practise “effectively and efficiently and as long as the legal transaction can be delivered in the best possible way for the client, I don’t care where the money is”.

This was particularly as awareness of cybercrime made people more nervous about sending money.

Any alternative, however “has to be robust and practical”, especially at a firm like hers where some clients sent money online but others came into the office with their chequebooks.

Marc Jones, risk and compliance director at City firm Travers Smith, explained how it has been gradually moving away from using its client account where possible over the past decade, largely because of the risk involved in holding client money.

It has used escrow agents instead and will only hold client money where two of the managing partner, senior partner and chief financial officer have signed it off as in the client’s best interests, and even then not above its professional indemnity insurance limit.

Cheshire-based Bridge Law Solicitors is regulated by the Bar Standards Board and so not allowed to hold client money – it uses a TPMA instead.

Managing director Claire Stewart said the fee-earner with responsibility for the file opened and managed an account on the TPMA platform.

“It’s safe and secure and it keeps costs down as the staff themselves are running the account. There’s no need for a separate person doing that and the checks are carried out by the third-party managed account provider. So for us it has worked very well.”

The cost was not prohibitive, she added, never costing the firm more than £500 a month in payments to Shieldpay, the provider. The firm has no accounts staff.

The question of client account interest was raised, with accounts rules expert Janet Taylor, co-founder of Taylor Mowbray – which provides financial management and business training to solicitors – saying that law firms were not as reliant on it as some were in the past, but it would be a consideration.

She questioned also whether removing interest would push up the cost of legal services.

Mr Philip said: “The money belongs to the client and actually you’ve got to ask yourself whether or not it’s really appropriate to be making lots of profit from other people’s money.”

Ms Charlton explained that her firm used the interest it received to offset operational costs not incorporated into its fees, such as paying estate agents’ fees or receiving money on account.

While expressing scepticism about TPMAs, she predicted that the move away from client account was ultimately “inevitable”.

Eaton-Evans & Morris is part of a home-buying pilot looking at modern methods of transferring money. “I think blockchain, digital signatures, electronic movement of funds will happen. Mortgage lenders don’t want to give money to law firms…

“And I think that the government will push efficiency in property buying and once you start taking mortgage advances and those large values away, then I think maybe you’ll see fraud not be such a big problem.”

Mr Philip concluded by saying the discussion had highlighted the potential “huge benefits” of doing away with client account.

“But… there are practical difficulties that would definitely need to be overcome. So we are at the beginning of this journey, we will consult on it, but it’s by no means a fait accompli

“But it does seem to me that in the medium term, particularly if there is no option, then a market will develop and I think that that market could easily develop to be a safer way for clients. And that’s what we are interested in.”

The SRA is accepting comments on the discussion paper until 1 July.

 




    Readers Comments

  • Michael Robinson says:

    Didn’t the ABI promise that motor insurance premium payments would fall if Parliament would only sort out whiplash claims?

    I think the infrastructure needs to be in place to allow much swifter transfer of money for property transaction completions before any change to the management of client money can be considered.

  • Realist says:

    Where there is money there is opportunity for financial crime. That would continue to apply to client funds held by third party managed account providers.

    How long until one of those providers is found to be misusing even larger sums of client money. This could be a lot worse for the profession and clients than a single firm misusing funds.

    Who would regulate the TPMA providers, this would just shift regulation and cost from the SRA to the FCA. Causing a more complex and unclear regulatory framework for clients. Your Solicitor regulated by the SRA to do your work but your funds subject to that work will be held by an FCA regulated TPMA provider.

    The SRA have failed to put adequate controls in place to prevent the misuse of client money. The SRA are now suggesting it would be much easier for them if firm’s just did not hold client money. Why do the SRA not just perform their role and put adequate controls in place.

    Even with this proposal there would still be financial misconduct within the profession, for example Litigation funding and billing practices.

  • Rob Peterson says:

    Will not holding client money reduce the indemnity premium,
    Would the Regulator please petition the Indemnity Insurers.!

  • Sue Ioannou says:

    What about probate practitioners. How do they hold estate funds without a client account

  • Robert Bastian says:

    I agree that it is for the SRA to do the job of regulating law firms including Client accounts. If we are recommending third parties to hold transaction funds passing regulation onto third parties would not, in my opinion, remove our responsibilities to our client if the third party misuses client funds. The complexities that would follow for jurisdiction between the two regulators would be mind boggling. .
    If third parties hold large amount of client funds will the client still be protected by the Bank deposit guarantee scheme?
    Lastly, why would there need to be any charge by the third party company for Administration , as they would make eye watering amounts of income from interest, unless every penny is paid to the Client?


Leave a Comment

By clicking Submit you consent to Legal Futures storing your personal data and confirm you have read our Privacy Policy and section 5 of our Terms & Conditions which deals with user-generated content. All comments will be moderated before posting.

Required fields are marked *
Email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Blog


Building a brand – lessons from Cazoo

Building a brand takes more than money – just ask Alex Chesterman, the founder of ill-fated online used car retailer Cazoo, which collapsed into administration last month.


The future of organic search for law firms

In a significant turn of events, thousands of internal Google search API documents have recently been leaked, shedding light on the intricate workings of the search giant’s ranking algorithms.


Commercial real estate: The impact of AI and climate change

There is no doubt climate change poses one of the most complex challenges for the legal industry; nonetheless, our research shows firms are adapting.


Loading animation