June 3rd, 2015  

In May 2014, the SRA published their updated Policy Statement on their approach to regulation and its reform. In that statement, the penultimate point (if you got that far!) notes that the then open “consultation paper on changes to the requirements for accountants’ reports on client accounts, is an initial stage in what will be a more significant piece of work in relation to the holding of client money. This will include consideration of the current SRA Accounts Rules with the aim of reducing length and complexity and a consideration of alternatives to the holding of client money and consideration of the risks and incentives related to the holding of such money.”

More recently in March this year, Sir Michael Pitt chairman of the Legal Services Board (the legal industries oversight regulator) was reported in the Law Gazette, when speaking at the Modern Law Conference, as advising that regulators were prioritising finding alternatives to holding client monies. That regulators have been considering escrow style bank accounts should not have come as any surprise to anyone involved in the legal industry;  I’ve attended several events where this has been openly mentioned at various times over the last year – for example by Annette Lovell (SRA’s Director of Regulatory Policy) at the ILFM Worcester COFA Breakfast in October.

Today’s consultation paper:

Well, we need wait no longer for the SRA’s proposals!  In April, we saw the release of a consultation paper rather benignly titled “Regulatory Reform Programme” which puts some more meat on those bones…..

Essentially there is only one proposal for alternative client bank accounts from the SRA; that being a move towards third party managed accounts (rather than solicitor managed client bank accounts). It’s a little disappointing perhaps that given the time this has been on the table along with the resources and contacts that the SRA has available to it, that they seem to be looking to respondents to the consultation to offer some innovative thinking!

This escrow-style service model, the SRA notes, is operated elsewhere in the legal services industry (such as those operated by the Bar Council and the Carpa in the French legal system) requiring dual authorisation, on the part of the consumer and practitioner, to approve access to funds. What I find most interesting is that the SRA are not consulting on whether this move should be implemented; in sales speak a classic assumptive close.

Rather the consultation asks whether the SRA should approve all specific third party managed accounts that may be used (either generally or in relation to a particular firm’s specific circumstances) or whether provided that all relevant safeguards can be identified in advance and that the SRA places appropriate criteria in the rules, that it will play no role in approving specific schemes.

Why wait?

No need to. Whilst the SRA advise that these proposals will not be implemented until November 2015, given that the current Accounts Rules do not prevent the use of such alternative arrangements, in their view there is no good reason to deny practitioners the flexibility offered by the new approach. They are therefore open to considering suitable requests to use such an arrangement on a case by case basis now; and within the consultation have issued an invitation to interested practitioners to contact the SRA’s Regulation and Education Team to discuss this further.

So not merely an assumptive close but a reality before the consultation responses have been made.

Quantifying the risk:

The justification for this change is on the grounds that there is a consistent risk to consumers, which is reflected in the number of cases related to the misuse of money or assets, is the misuse of funds from client accounts. So going back to Mr Pitt, at that very same conference, to quantify this risk. He reported that in 2013 there were more than 140 reports of solicitors misusing client money or assets each month and that in total, more than 1,200 claims were made against the compensation fund, with a total value exceeding £29m – the majority of which related to misappropriation of client funds.

Now I am the first to agree that £29m paid out by the Compensation Fund (which is itself funded by the legal profession) is a significant sum of money. But in the context of the billions of pounds of client money that is held securely every day by the vast majority of law firms in England and Wales?

Another positive driver for change other than to reduce consumer risk would be to deliver any cost savings to the consumer to increase access to justice or to drive forward improvements in the speed and effective delivery of legal services to consumers.

Potential Cost Savings?

• Reduced practising certificate fees? Well that assumes claims on the compensation fund will reduce.
• Savings on PII? Again that assumes that insurance underwriters will take the view that the reduced risk of misappropriation of client monies is sufficient to make any real difference to law firms’ premiums across England and Wales. Remember the £29.0m that Mr Pitt quoted was funded not by the insurance industry but by the legal profession…………….
• Abolishing the Reporting Accountants report? With the proposal of dual authority over the client money held in escrow bank accounts it’s not really a leap to assume that’s also on the table particularly as this has already been consulted on.
• More like increased costs! Initial thoughts are the loss of general client interest income, increased transactional bank charges, more bad debts and higher cost of credit management as payment on account monies will potentially be less accessible.

On the face of it, I’m not sure that there’s an argument for achieving real cost savings – at least nothing significant enough to translate into a reduction in charge rates resulting in increased access to justice.  And that’s before considering that there is a real likelihood of increased soft costs such as higher administrative costs for both law firms and their banking partners in dealing with literally millions of new dual authority bank accounts.

Improving speed and effective delivery of quality legal services?

My first sense is that overall that’s probably unlikely certainly in the interim. And now factor in the additional parties into the movement of funds process? I don’t think you need to be an accountant to do the maths!

Believe me I’m not change adverse – in fact given that I am driven to achieve continuous improvement in all areas of my professional life, I’m quite the opposite – but it is difficult to see how changing the current model of solicitor operated client bank accounts to the SRA’s proposal is going to deliver any real improvements in the speed and effective delivery of legal services.

What else is up for reform?

The alternative client account changes are only one small aspect of this consultation as the SRA felt that these proposals “are too narrow in effect to warrant their own consultation”……………

Other legal finance and management specific proposals include:

• Simplifying compliance officer approval for small firms (1-4 managers)
• Operational changes and improvements for ABS authorisation
• Guidance on recording of non-material breaches
• Clarification on the outsourcing of legal and operational functions

The consultation closes Thursday 11th June – have your say at http://www.sra.org.uk/sra/consultations/regulatory-reform-programme.page.