The Solicitors Regulation Authority has announced that the future of the client account and the compensation fund are likely to be changing soon, and that solicitors should prepare.

On Nov 5, the regulator also said it would be consulting from the following week onwards on the outcome of its consumer protection review. It also warned that the proposed changes will likely affect a number of firms’ business models.

The consultation is now set to be split into three sections: firstly, the client account. Secondly, the rules concerning accountants’ reports, and, thirdly, the most efficient ways in which the SRA can support the compensation firm in the long run.

The SRA was also eager to emphasise that these were long-term issues that needed to be wrestled with. In the wake of abundant criticism following the collapse of Axiom Ince (which occurred last year), the regulator insisted that the event had brought with it a renewed focus on particular areas.

The consultation will also largely consider the approach to the regulation of solicitors’ accounts – a flagged area of concern in the Legal Service Board’s Axiom Ince report. Also reconsidered will be the implications of one individual making unilateral decisions affecting client monies.

Amongst the propositions already being is whether or not to abandon client accounts altogether and use third-party providers to hold clients’ money. Anna Bradley of the SRA told the Gazette that the environment in which client monies are held has changed but acknowledged there would need to be more development in terms of potential third-party providers before such a significant reform.

The Gazette article also discussed how a more immediate plan of action would be to tighten the rules on firms holding residual balances or making money from interest on client account funds. Bradley: ‘For some people [residual] balances are seen as a source of income. We have heard worrying things from some firms that if they didn’t have that cash they would be in some difficulty. But that is not what that cash is there for.’

The SRA first moved away from a prescriptive regime in 2015. This resulted in firms having to be qualified before being able to submit accountants’ reports, and, according to the Gazette, the number of these reports fell from 2,000 in 2016 to 500 in the last year alone. Despite this, there has reportedly been concern that some firms are still not submitting these reports as required. This may result in the SRA re-introducing the pre-2015 rule, which could mean mandatory submissions on every accountant’s report.

Further options considered include the possibility of requiring firms to make declarations on reports that have not been qualified, but, ultimately, the consultation will concern the compensation fund’s future. Paul Philip (Chief executive) announced, “There is no suggestion that solicitors want to remove the fund or the protection it gives clients, and there are no discussions about changing which clients should be eligible to make claims.”

“But the current requirement that firms and solicitors split the financing of the fund equally may come under scrutiny, as will the current position that all firms pay the same contribution regardless of size or risk factor.”

Lastly, the SRA have confirmed the consultation will last the full three months, yet no decisions will be made until the middle of next year.

See the full Law Society Gazette article here: Solicitors braced for potential changes to client account.

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