The Solicitors Regulation Authority (SRA) has unveiled significant reforms aimed at transforming how law firms handle client funds, proposing measures that include a prohibition on retaining interest and tightening restrictions on the collection of advance fees.
The recent proposals from the SRA mark a decisive move towards reducing the reliance on holding client money. With long-term plans to find suitable alternatives, the SRA suggests a 12-week deadline for returning client funds after a matter concludes. This approach reflects a commitment to client interests, with around 7,000 firms currently declaring they held client money in the past year.
Among these firms, 4,500 held an average of less than £100,000, while another 3,500 had balances exceeding £1 million. A notable few had client accounts surpassing £100 million, and some even surpassed £1 billion, underscoring the scale of funds involved. The SRA’s consultation is part of a broader initiative launched following a review of consumer protection earlier this year.
The authority’s research highlights consumer discontent over the management of client money, particularly the expectation that interest should be returned to clients. Instances of firms using interest to subsidise operating costs or enhance profitability were cited, with some asserting their survival depends on this practice. Nevertheless, delays in returning client money after case completion have raised concerns about residual balances.
The incentives for firms to retain client money do not align with clients’ best interests, according to the SRA. Instead, clients should receive all interest, with firms reflecting actual operating costs through fees. This proposal includes consideration of a minimum threshold for accruing interest. The SRA acknowledges international models, such as in Canada, France, and Australia, where interest aids pro bono services and education, but notes client interest might not be fully returned under such schemes.
Additionally, the SRA is contemplating whether excess funds should be returned to clients within 12 weeks post-matter, with further efforts to trace clients if necessary. When untraceable, the funds could be donated to charity or the SRA, particularly if they exceed £500. The authority also contemplates imposing stricter requirements for firms to keep client contact details current.
The proposed changes include tightening rule 2.3(c) of the accounts rules, which currently allows flexibility in client money arrangements. This flexibility, the SRA argues, could prioritise firm interests over clients’. Risks include lack of readily available funds for clients withdrawing retainers or firm insolvency, leading to potential loss of ringfenced client money.
The SRA is keen on encouraging fixed fees for long-term legal work, proposing clearer points for fee transfers into office accounts. It also aims to amend rules on expense reimbursement, allowing firms to reclaim costs, such as Land Registry fees, from client accounts without prior notification.
Finally, the SRA seeks feedback on whether to limit advance fees in client accounts to necessary amounts for case proceedings. Reports suggest firms are increasingly demanding higher upfront fees, prompting a discussion on appropriate fee structures for varying case durations.
These proposed reforms by the SRA highlight a commitment to placing consumers’ interests at the forefront of legal financial practices, aiming for greater transparency and accountability in the handling of client money.
