The future of the client account and the compensation fund are among a glut of issues on the table for discussion, the Solicitors Regulation Authority has revealed.
The regulator said yesterday it will consult from next week on the outcome of its consumer protection review, with proposed changes likely to significantly affect some firms’ business models.
The consultation is set to be split into three sections: the client account, rules on accountants’ reports and the best way to support the compensation fund in future.
The regulator is keen to stress that these are long-term issues which needed to be addressed, but acknowledges that last year's collapse of Axiom Ince – for which the SRA has been heavily criticised – has brought a renewed focus on certain areas.
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One option to be put forward is to ditch client accounts and use third-party providers to hold consumers’ money. SRA chair Anna Bradley 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 radical reform.
A more immediate reform would be to tighten the rules on firms holding residual balances or making money from interest on client account funds. Bradley said: ‘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 approach of regulation of solicitors’ accounts is also going to be re-examined, after being flagged up as an area of concern in the Legal Service Board's Axiom Ince report.
The SRA moved away from a prescriptive regime in 2015 to require firms to submit accountants’ reports only when they have been qualified. The number of these reports has fallen from 2,000 in 2016 to 500 last year. There is concern that some firms are not submitting them as required. It is possible that the regulator could re-introduce the pre-2015 rule for firms to submit every accountant’s report. Another option may be to require firms to make a declaration that a report has not been qualified.
The consultation will also look at whether to prevent one individual from making unilateral decisions affecting client monies.
The final element of the consultation will concern the future of the compensation fund. Chief executive Paul Philip said 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.
The consultation will last the full three months. No decisions will be made until the middle of next year at the earliest, the SRA said.
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