The Dorset Law Society extend their thanks to all of the firms and individuals who responded to the SRA’s consultation for Client Money in Legal Services.
We submitted a response to the SRA on behalf of lawyers practising in Dorset and we are confident that our collective voices will make a huge difference.
Following closure of the consultation deadline on 21st February, it has been reported that the SRA have also received strong backlash from the City Legal Sector.
Click here to read the full article published in the Law Society Gazette on 5th March 2025
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On the 15th February 2025 we reported:
“The most significant change to Solicitors’ businesses in the last 25 years”
Have Your Say: Why you should participate in the SRA’s consultation: “Client money in legal services – safeguarding consumers and providing redress” Your input is crucial
The Solicitors Regulation Authority (SRA) has launched a consultation that could fundamentally reshape how Solicitors handle client money. It also proposes major changes to the Compensation Fund. This is one of the most important consultations for Solicitors in over 25 years, and it’s critical that you, as a Solicitor, have your say.
As members of the Dorset Law Society, we encourage all members and member firms to engage with this consultation.
What is the consultation about?
The SRA proposes that:
a Solicitors should no longer hold client accounts. These should be outsourced to third party providers;
b All interest received on client money should be paid to the client; and
c The way in which the Compensation Fund is paid for should be changed.
Who can respond?
You can respond as an individual as well as through your firm. The volume of responses the SRA receives is taken as a measure of the importance of proposals to practitioners.
Why should you engage with the Consultation?
1. Trust is key
It’s essential that clients can trust law firms with their money and affairs. If Solicitors are no longer permitted to manage client funds by the regulator, it sends a stark message to the public about our profession’s integrity. The ability to handle client money is central to many transactions. The SRA’s proposals undermine the reputation and trustworthiness of the legal profession, as a whole. Without the ability to handle client money in the context of transactions, we risk eroding the public’s confidence in our ability to manage their legal work.
2. The impact of all interest being paid to the clients
For many firms, especially those with property and probate departments, the amounts held in client accounts can be substantial. A medium-sized firm, for example, might hold around £20 million in client funds. Banks offer firms higher interest rates than clients can access themselves – rates could be 3%, compared to 1.3% which the client can achieve with a standard instant access account.
Rule 7 of the Solicitors Account Rules states “You account to clients or third parties for a fair sum of interest on any client money held by you on their behalf.”
Most firms therefore pay the 1.3% to clients, as this is the percentage rate they could have obtained. The firm then retains the difference. Using the above example, a firm would make about £340,000 per annum on their client account interest.
Since Covid, expenditure has risen, especially IT costs, cyber security, utility bills, and wages. It does not appear that many firms in Dorset have passed these costs on to their clients. Firms have been able to use income from increased interest rates to off-set increased overheads. If firms can no longer retain excess interest on client money, firms will be forced to raise hourly rates and fixed fees to cover the increased overheads.
3. Increased Costs of Third-Party Money Management
The SRA is considering alternatives to Solicitors holding client money. Whilst this could reduce certain administrative burdens, using third-party providers to manage the transfer of funds or estate distributions, will likely add to the complexity and cost of a matter. The time, effort, and transaction fees involved in engaging these services may make legal transactions more expensive for clients, and could also complicate the completion process for regulated law firms.
4. A Minority Taints the Majority
Many firms are unfairly tarnished due to the non-compliance of a small minority of firms who fail to follow the Solicitors Accounts Rules. This creates a regulatory environment that is harsher than it needs to be for the vast majority of law firms that comply with the rules. The SRA’s proposals could unfairly penalise compliant firms if they are not carefully considered.
These suggested changes have been raised following the Axiom Ince catastrophe, where it is believed an estimated £60 million of client money was used improperly or stolen. The SRA appear to have been asleep at the wheel.
Axiom Ince acquired the practices of two ABSs, Ince Gordon Dadds LLP and Plexus Legal LLP (each of which had a history of insolvencies). However, the SRA did not undertake additional scrutiny of an organisation that had grown hugely. The abilities of the managers of Axiom Ince were not scrutinised by the regulator.
Rather than addressing their own failings, the SRA wish to remove any responsibility they might have in the possibility of it happening again, by removing the ability for law firms to handle client funds.
5. Concerns over third-party transfers
If client money is to be transferred by third parties, how will this affect the structure and timing of transactions? Solicitors need clarity on how this will work in practice and how they can best manage the process. This uncertainty raises practical questions about how to ensure smooth operations for clients and law firms alike.
Solicitors’ undertakings are the basis on which most corporate and commercial transactions are completed, and often out of hours. Placing a money handler layer between the Solicitors acting for the counterparties will complicate transactions and increase costs.
6. The potential for multiple suppliers
The SRA has suggested that multiple third-party providers may be involved in managing client funds. This raises questions about how this will function in practice. How will firms manage multiple suppliers, and will they have the necessary support and information to make informed decisions? These are critical issues that must be addressed for firms to operate effectively and efficiently.
The suggestion is that additional IT will make things work frictionlessly. However, you will know that new IT brings with it all manner of issues about its cost, resilience and compatibility with existing practice management systems.
7. Unregulated entities could under-price regulated firms
If Solicitors are no longer able to handle client money, the benefits of being a regulated firm are significantly eroded. Without the overheads, unregulated legal services businesses will have a significant advantage. .
The inevitable additional cost of managing transactions via third party ‘money handlers’ and the removal of interest being a benefit to the firm will result in law firms having to increase their costs to clients. Consequently, unregulated competitors will be able to offer their services at a lower cost, making it much harder for regulated firms to compete on price.
Experience shows that the public is drawn to cheaper options. People will be unaware or unconcerned that they may not receive the same level of consumer protection and professional oversight. The misperception that all providers of legal services have the same standards and offer the same protections is difficult to change.
8. Delivering and paying for a sustainable Compensation Fund
The SRA is examining how the Compensation Fund is financed and how payments from the Fund to reimburse consumers should be allocated. This includes considering the calculation of payments from the profession and the allocation of reimbursements to consumers. The goal is to ensure that the Compensation Fund remains sustainable and effectively compensates consumers who have suffered financial loss due to Solicitor misconduct.
As law firms pay into the Compensation Fund, we need to have a say in how it is used. As a result of the Axiom Ince issue the cost of practising certificates this year was significantly increased.
Is there an upside?
For some firms, opting not to handle client money could reduce time and complexity. But for this to be a viable option, it must:
1. Save both time and money for both the firm and the client;
2. Not place an excessive burden on firms;
3. Potentially reduce the AML and risk compliance; and
4. Ensure that third-party providers are reliable, transparent, and fair in their fee structures.
If firms cannot retain income from interest, then almost all will have to increase their fees and the client will be aware the costs of legal services, have increased across the board.
Firms could charge the client for managing the funds, which most probably don’t do at the moment, because the interest helps cover this cost.
Removing the ambiguity of Rule 7 of the Solicitors Accounts Rules is likely to be of benefit to all. The SRA could produce clear guidance on the amount of interest payable to clients, which would provide certainty for firms and clients alike. Clients would receive interest, but the firms would also be able to retain the excess over standard rates.
The practical impact on your firm
The Legal Problem and Resolution Survey, which surveyed 10,324 people in 2023, measured people’s experiences of everyday problems that may have a legal solution through the courts and tribunal system. According to this survey, only 5% of people with legal problems sought advice from a law firm and nearly a third (32%) obtained help from another adviser.
This demonstrates that these changes could be catastrophic to law firms, if the perception is that firms cannot be trusted to handle client money and at the same time we need to dramatically increase costs.
The practical impact on you
Your career will be impacted by these changes, and it might not be for the better.
Take some control and reply to the consultation. This is your chance to influence the future of how client money is managed, how consumer protection is structured, and how the Compensation Fund works. The proposals have the potential to significantly impact your practice, whether you handle client funds or not. By responding to the consultation, you can contribute to ensure that the regulations remain balanced, fair, and in line with the realities of modern legal practice.
What can we do to assist
Here are links to the consultation, which has been divided into three parts:
- Part 1: The model of Solicitors holding client money. Covering issues such as how, when and for how long law firms should hold client money (if at all), alternatives to operating a client account and if rules around interest earnt on client accounts, or how long firms can hold client money after the end of a case, need changing so they better serve client’s interest.
- Part 2: Protecting the client money that Solicitors hold. Covering issues relating to controls, checks and balances that firms are obliged to have in place to protect money held in client accounts. This includes how accountants’ reports are prepared when they need submitting to the regulator and approaches to dormant firms.
- Part 3: Delivering and paying for a sustainable compensation fund. Covering issues such as how funding of the scheme is split between law firm and individual Solicitor contributions and whether, in the longer term, contributions should be varied based on considerations such as size of firm, areas of law or other risk factors. The consultation also explores questions around potential payment caps and whether certain types of claim should remain eligible.
Each part has a series of questions they would like you to respond to. This does make replying to the consultation easy. However, please bear in mind that the questions have been written by the SRA and therefore they may encourage you to answer in a certain way or not include points you would have otherwise made.
You can submit a written reply and not use the suggested questions, should you wish Make sure you do include all points you wish to make. If you would like further advice or help with the consultation then please contact us by email.
We welcome your thoughts and comments about the consultation. We can anonymously pass these onto other firms and Solicitors.
The consultation is open until February 21, 2025, and we strongly encourage all members of the Dorset Law Society to take part.
You can respond as an individual as well as through your firm. The volume of responses the SRA receives is taken as a measure of the importance of proposals to practitioners.
Your feedback will help shape the future of the profession and ensure that the regulatory framework serves the interests of Solicitors and clients alike.
Let your voice be heard—engage with the consultation today!
