Time to look at alternatives to lawyers holding client money, regulator suggests

The Solicitors Regulation Authority (SRA) has suggested that the era of solicitors holding client money may be coming to an end.

Recognising the practice was “well established, but not inevitable”, SRA chief executive Paul Philip added that it did “not feel right” for solicitors to profit from interest on their clients’ money.

Mr Philip said: “The advent of digital banking brings opportunities to introduce more sophisticated and robust systems, suitable for tackling increasingly complex challenges around issues such as cybercrime and money laundering.”

He added that regulation costs would also drop significantly if solicitors no longer held client money.

There are several examples from other countries that the UK could follow. In France, for example, client funds are dealt with via the Lawyers’ Compliance and Clients’ Funds Handling Services (CARPA), with each local law society having its own account.

Writing for Legal Futures, Mr Philip stressed that while no decisions had been made yet, various alternatives were under consideration.

“Even if it is too soon to place a blanket ban on firms directly holding client money, we are thinking through different options. We could significantly increase checks and balances for firms involved in riskier areas of work. Or we could mandate that firms can only hold client money if they provide greater reassurance around the robustness of their processes.”

“We are also looking at whether it is ever appropriate for firms to benefit from interest on client money.

“Firms must pay a fair sum of interest to clients, but should firms be topping up their income through interest earned on client balances? That doesn’t feel right to me – it’s the client’s money after all.”

Earlier this year the SRA suggested it would also benefit from wider powers to launch investigations into law firms.

“We don’t have the statutory powers to do a spot check or an inspection other than in anti-money laundering work,” Mr Philip told a parliamentary committee.  “We would very much like to do spot checks or inspections of firms across the board but at the moment we need a very specific trigger in relation to an allegation of misconduct to do that.”