Following the fallout from Axiom Ince and other high profile law firm failures, the SRA have branded the possibility of introducing an alternative system to holding client money.
This was most recently raised within the Consumer Protection Review and part of the consultation questions they asked for responses to.
Although it is accepted that there is a risk in holding client money, it is not the concept itself of having such accounts that can lead to fraudulent behavior, but of the individuals themselves.
From our experience as Reporting Accountants, most solicitors and law firms use client accounts and abide by the Accounts Rules in the appropriate way.
It should be remembered that solicitors are professionals and should act with integrity as well as in the best interests of the client. Use of a client account is part of the relationship of trust between a solicitor and their client. If there are doubts as to whether a solicitor can be trusted holding client money, how does this impact on the standards of work and advice they are to give?
It is true that there are countries (such as France) with systems where law firms don’t hold client money, but these have been in existence for some time, and it will be extremely difficult to introduce such a fundamental change across the board.
There are wider impacts to the consumer if client accounts are abolished as well. If money is held in Third Party Managed Accounts (TPMA’s), there may be delays in accessing funds when needed as the control over the monies is no longer held by law firms. This may be most prevalent in conveyancing matters where there are often strict deadlines on completions. In situations where solicitors are unable to release funds in time, such delays could result in loss claims for failed transactions.
Further, there are logistical issues with all law firms using TPMAs. There is currently only one major provider of such a service and practices will have to navigate the costs of operating such an account. Some firms may not be able to afford to use an external source to hold client monies, and ultimately, we may see the cost transferred onto the consumer.
TPMA’s were first introduced by the SRA in Rule 11 of the SRA Accounts Rules 2019. In the 5 and half years since, as a concept they have not really taken off in the way which the SRA perhaps anticipated. It would be interesting to look at why this is the case and whether it is because of some of the issues already identified above.
Third Party Managed Accounts Final Thoughts
"If TPMA’s are used widespread across the profession, will this mean that fraudulent behavior by those small minority of solicitors will suddenly vanish?
This is unlikely. Those who wish to commit fraud will usually find a way of doing so, and in fact as things stand there would be less external scrutiny as funds in a TPMA are not considered client money and therefore an Accountants Report in respect of this account is not currently required."
What the use of TPMA’s does result in, however, is taking the regulation of these monies away from the SRA, and in turn reduce the pressure on the compensation fund.
There will therefore continue to be a debate as to the best ways to hold client money, but a tightening of procedures within the present Accounts Rules may be the short-term answer.
One thing is for certain - if the holding of client money by law firms is decided by the SRA to come to an end, it certainly would not be able to be done any time soon.
