Hayhoe: SRA needs to set timetable for client money consultation
The Solicitors Regulation Authority (SRA) has been asked to explain why it is requiring only notification of impending mergers and acquisitions (M&As), rather than its approval.
The Legal Services Consumer Panel (LSCP) also called on the SRA to commit to launching a consultation within a year on whether law firms should continue to hold client money or instead use third-party managed accounts (TPMAs).
The SRA proposed in a consultation issued in June a rule to require firms to notify it of certain events that it prescribed, the first two being M&As and beginning to hold client money.
In its response, the LSCP backed the move but contrasted it with the Financial Conduct Authority’s change in control regime, under which a person must obtain the regulator’s prior approval, not simply give notice, before acquiring or increasing control of an authorised firm, and proceeding without approval is a criminal offence.
“Given the scale of harm, a poorly managed merger or acquisition can cause, as Axiom Ince demonstrates, the panel would ask the SRA to explain, in its consultation response, why a notification-only model was preferred to an approval-based model of the kind long established in financial services, rather than assuming the case for the lighter touch approach is self-evident.”
Again citing Axiom Ince, the panel also cautioned against scaling back the notification requirement for smaller transactions.
“A firm growing quickly through a series of individually small acquisitions can accumulate the same change in risk profile as a firm completing one large transaction, and a threshold set at the level of the individual deal would not capture that pattern.”
But Mr Hayhoe said the consultation, like the two on client money that preceded it, continued to “tinker at the edges” of a much larger problem.
“Each new notification requirement and each new fixed penalty add another layer of monitoring to a model whose core vulnerability, that client money sits with the firm rather than with an independent, ring-fenced custodian, remains completely untouched.”
The SRA said in the consultation that the issue could not be “quickly resolved” and that it would return to it in due course, with no date attached. Mr Hayhoe said the panel did not accept that this could “continue to be deferred indefinitely while narrower reforms accumulate around it”.
Instead, the LSCP called on the SRA to commit to launching a formal consultation in the next year on requiring or defaulting to TPMAs “for some or all categories of client money”.
Further, it needed to set out a clear timetable for deciding whether to adopt one of the alternative models its own published research has already identified, such as TPMAs, escrow arrangements or a reduced client money holding model of the kind used in France and Singapore, “rather than commissioning further evidence gathering as a means of delay”.
The regulator should also set out “a clear assessment of which categories of client money (for example, conveyancing completion funds as against smaller transactional balances) are best suited to a move away from firms holding money directly, so that reform can proceed in a targeted way rather than waiting for a single, all-encompassing solution”.
On the timing of early notification, Mr Hayhoe said the panel agreed with the SRA on the heads of terms stage but wanted the SRA to explain what the equivalent trigger should be for transactions that proceeded without such a stage, “so that firms cannot delay notification simply by not producing one”.
He added: “Earlier notification only translates into better consumer protection if it is matched by a clear process on the SRA’s side for acting on it.
“The panel would therefore also welcome more detail from the SRA on what happens once a notification is received: what internally triggers closer scrutiny or intervention, how notifications are risk assessed and escalated, and what firms and consumers should expect to see change as a result of this new visibility.
“Without that, the proposals in this consultation risk improving the SRA’s information without improving its ability to act on it in time.”
In its response, the Law Society opposed a broad notification power and did not agree that heads of terms stage “the most appropriate or proportionate trigger”, a view shared by specialist law firm CM Murray.
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