Solicitors are being asked by the Law Society whether separate client accounts should be abolished, as part of a consultation on the accounts rules.
The society said it “could be argued that given the billions of pounds of client money that is held by practitioners and the comparatively small amount that is misused, the requirement to hold client money in a separate account is unnecessary”.
Chancery Lane said the Solicitors Regulation Authority (SRA) position on regulation, “in line with government policy”, was that “if it is not possible to provide evidence to suggest that there is a sufficient rationale for keeping a requirement, it should be removed”.
However, the society pointed out that removing client accounts “may increase opportunities for the misappropriation of client money” and make it easier for solicitors in financial difficulty to borrow client money and remain undetected.
“Some solicitors already experience difficulties keeping proper client account records when the funds are held in a separate account – it would be even more difficult to maintain records without a client account.
“It may also increase the burden of record keeping. It is likely that reconciliations of all office transactions as well as client transactions will be mandatory if funds are mixed. If this option were adopted, it is likely that practitioners would require some comprehensive retraining.”
Along with abolishing the need for separate accounts, the society said this option would involve simplifying and cutting the size of the accounts rules.
The society outlined five other options for the future of client accounts, to gauge the opinion of solicitors in the run-up to the SRA’s review of the accounts rules, due this spring. These included retaining the current rules and simply removing the rule which puts responsibility on compliance officers for finance and administration (COFAs).
The society said the obligation already rested with the compliance officer for legal practice (COLP) and the firm’s managers to follow the rules.
“It is open to the COLP to delegate elements of financial control and reporting to the COFA while retaining primary responsibility. A separate onus on the COFA is unnecessary. However, it may be argued that placing requirements on non-solicitors encourages good behaviour throughout the firm.”
A further option cited by the Law Society would be to replace the existing rules with a “less prescriptive” approach based on the overseas accounts rules and closer to that of the American Bar Association.
Another would be to simplify and reduce the size of the accounts rules, but keep the requirement for separate client accounts.
The final option would be to adopt a de minimis approach, disapplying certain rules to firms which only used client accounts sparingly.
The society said it would use the views of the profession as a starting point to develop its policy position, and so was not recommending any option at this stage.
The SRA decided last autumn to postpone the introduction of third-party managed accounts as an alternative to traditional client accounts, and include the issue in its review of the accounts rules this year.