SRA | Consultation on possible changes in the way client money is handled in the legal sector

Consultation on possible changes in the way client money is handled in the legal sector

November 14, 2024

As part of our ongoing review of consumer protection arrangements in the legal sector, we are advising on potential changes to how and when law firms handle client money, and how this money is protected.

Client money in legal services – protecting consumers and providing redress advice – also takes into account future arrangements for the compensation fund, including how the scheme is funded.

Among the key issues examined in the consultation are:

• Whether in the digital age, and as more and more viable/credible alternatives become available that can better protect customer funds, it is still necessary or desirable in the longer term for companies to hold customer funds on such a large scale as is currently the case, or not at all.
• If the rules surrounding the interest earned on client accounts, or how long firms can hold on to clients’ money after a case ends, need to be changed so they can better serve the client’s interests.
• If changes are needed in controls, checks and balances are mandatory that businesses must have in place to protect the money held in customers’ accounts. This includes obligations with regard to auditor’s reports and certain rules regarding the audit and supervision of client funds.
• If changes are needed in the way contributions to the compensation fund are determined. For example, by changing the 50/50 split between individuals and companies that finance the scheme to a 70/30 ratio. Longer-term questions are also being asked, such as whether contributions should be varied based on considerations such as company size, jurisdictions or other risk factors.

Proposals have been developed in light of the extensive feedback we received following the publication of our Consumer Protection Review discussion paper in February 2024. As part of this exercise, we held a wide range of focus groups, roundtables, events and direct conversations , involving more than 200 members. of the public, the profession and wider groups. The proposals are also based on the findings of externally conducted research into areas such as consumer attitudes and perceptions, approaches in other jurisdictions and sectors, and analysis of future risks.

Paul Philip, CEO of the SRA, said: ‘This has been one of our largest and most in-depth pre-consultation exercises ever to date. We are grateful to everyone in the public, the profession and elsewhere who has taken the time to share their views.

“What we heard has confirmed that safeguarding consumers’ money must be the priority. There was also widespread support for the vital role played by the SRA Compensation Fund, while questions were asked about how the system should be financed in the future and how we can ensure its overall sustainability.”

The launch of the consultation is just one part of a wider program of work arising from the Consumer Protection Review. Other activities already completed or underway include:

• Publication, earlier this year, of warning messages to law firms about mergers and acquisitions and what to do if money is missing from the client’s account.
• Conducting an assessment and implementing any resulting improvements to our internal processes for how they handle investigations and interventions.
• Improving the way we use law firm and complaint data to identify patterns, including by increasing investment in technology and resources in this area.

The consultation will run for 14 weeks until 21 February 2025. During this period we will also host a series of engagement events with the public, the legal profession and wider stakeholders.

Visit our consultation for more information and how to have your say.