SRA: Rules would need revisiting
Solicitors may be faced with higher costs if the government wants the Solicitors Regulation Authority (SRA) involved in managing an Interest on Lawyers’ Client Accounts scheme (ILCA), it has warned.
The regulator also said it may have to ban firms from being able to agree arrangements to hold money outside of a client account.
In its response to the consultation on an ILCA scheme, the SRA said the Ministry of Justice (MoJ) may want the SRA to have a role in its ongoing administration, particularly in relation to “monitoring, enforcement and sanctions arrangements”.
It explained: “Any new arrangements will likely incur costs which would need to be funded. This would include both upfront implementation costs and the ongoing management of the arrangements.
“We would anticipate incurring implementation costs for resourcing the management of a major project; designing and creating new IT systems or data collection arrangements and communicating the impact of these changes to the profession.
“Ongoing management would include activities such as any additional data collection and analysis and legal enforcement activity.”
As a result, “considerations would be needed” as to whether practising fees would need to rise to pay for this.
The response added that, should the MoJ want the SRA to collect and share data on interest accrued on client accounts, there would need to be a data-sharing agreement setting out “clear governance arrangements” on who could access the data, for what purposes, and subject to what safeguards.
The SRA supported the MoJ’s proposal that the remaining interest on client accounts that has not been remitted to the scheme, should continue to be subject to its regulation.
Rule 7.1 currently requires firms to account to clients or third parties for a ‘fair sum’ of interest on money held on their behalf, while rule 7.2 allows them to agree an alternative arrangement for handling interest accrued on money held for a client, but only where the client has given informed, written consent.
Accounts rule 2.3(c) allows firms and clients to agree that money be held outside a client account.
The SRA said responses to its 2024 consultation on client money showed wide variations in how a ‘fair sum’ is interpreted across the profession, and that introduction of an ILCA scheme would require it to revisit the concept, given that the amount of remaining interest would be significantly reduced.
“We may need to consider whether firms should continue to exercise professional judgment in determining ‘fair sum’ or, for instance, whether all remaining interest after remittance under ILCA should be returned to the client, subject to a de-minimis allowance.
“We may need to reconsider the suitability of rule 7.2 to ensure transparency for consumers given that any alternative arrangement for the payment of interest to the client would need to adhere to the ILCA scheme, reducing the amount of interest available to consumers under such arrangements.”
The 2024 consultation canvassed abolishing accounts rule 2.3(c) but the SRA decided not to proceed with it because of concerns about the potential adverse impacts on certain consumers, and the risk of reducing the attractiveness of the fixed fee market.
But it may have to reconsider this, “given that the option for firms to enter into arrangements to hold money outside of a client account could have the potential to deliver outcomes that do not align with the intention of the ILCA scheme”.
As the detail of the ILCA scheme developed, the response noted, other regulatory issue may emerge, such as the treatment of interest on monies held by the SRA in its statutory trust fund following interventions into firms.
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