Watchdog has 'no confidence' client money is being protected

The legal consumer watchdog has called for the Solicitors Regulation Authority to go further in its proposals for stopping solicitors holding client money, saying the current rules are failing to prevent misappropriation.

The Legal Services Consumer Panel said it has ‘no confidence’ that the existing framework offers adequate safeguarding of client money. Responding to the SRA’s consultation on client accounts and consumer protection, panel chair Tom Hayhoe said the collapse of Axiom Ince, which left millions of pounds of client money unaccounted for, underscored the inadequacies of the current system.

‘The starting point is the SRA’s own authorisation, monitoring and supervision processes which have been found wanting,’ he said. ‘This consultation disproportionately focuses on residual balances and interest, rather than tackling the central issue of misappropriation. While these are important considerations, they do not address the root cause of consumer detriment.’

The panel is calling for the SRA to take decisive steps towards gathering the data needed to make any informed decision about whether client money should be held through third party managed accounts. It was critical of the regulator for not doing this preparatory work and said the SRA should already be presenting the profession with options based on evidence.

Hayhoe added: ‘The central issue is how to prevent solicitors from misappropriating clients’ money. The strongest proposal for addressing this is mandating TPMA and prohibiting law firms from holding client accounts or, at the very least, precluding high-risk firms from handling client money.

‘The SRA’s reluctance to signal strong consideration or transition to TPMA managed accounts appears to overlook significant opportunities for enhancing consumer protection, fostering innovation, and aligning legal practices with modern financial standards.’

On residual balances, the panel called for stricter rules to stop firms artificially creating or retaining residual balances, such as requiring detailed accounting records and regular audits.

Clear rules, it was suggested, are needed to require firms to distribute interest built in the client account to clients, unless there is explicit agreement otherwise.

‘We note that in some jurisdictions, all interest on client accounts is pooled and used to fund legal aid or other public interest projects,’ added Hayhoe. ‘While we remain neutral on the feasibility of such an approach in the UK, we would welcome its exploration, supported by data and sophisticated analysis.’

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