The Solicitors Regulation Authority (SRA) questions the ethicality of solicitors retaining client account interest.
- Some firms reportedly depend on this interest to maintain financial stability.
- A consultation will explore client money handling and potential policy changes regarding interest retention.
- The SRA raises concern over firms using residual balances as a primary cash source.
- The consultation also addresses the return policy for client account residual balances.
The Solicitors Regulation Authority (SRA) is set to probe whether it is appropriate for solicitors to keep interest earned from client account money. This move comes amid concerns that some firms rely heavily on this interest for financial solvency.
An alarming finding revealed that interest from client accounts made up over 10% of the turnover for one in six of the surveyed law firms. As part of the consumer protection review, the SRA will launch consultations on various aspects of client money management. These include the current model of solicitors holding client money and the safeguarding of such assets.
SRA Chair Anna Bradley expressed worries about the potential for firms to misuse client funds, highlighting that interest from residual balances is not intended for firm income. Reports suggest that without this income, certain law firms would face financial hardship, which raises alarms about the misuse of client funds.
A proposed change is to enforce a timeline within which residual balances must be returned to clients. Currently, the requirement is simply to return such balances ‘promptly’. The extensive consultation will also scrutinise if retaining any interest is ever justifiable, as noted by Aileen Armstrong, the SRA’s executive director for strategy and external affairs.
The rising interest rates have led to significant client account interest, with 41% of firms earning interest exceeding £1 million. Results revealed that for some, this accounted for over 10% of their turnover, challenging the notion that these sums are ‘incidental’.
The government, too, is examining the role of client account interest, contemplating the possibility of redirecting these funds to support legal services for those unable to afford them. This investigation signifies the widespread importance of resolving the issues surrounding client account interest.
A central protection mechanism for client money is the annual accountant’s report. Upcoming consultations may revert to demanding more comprehensive reporting, a practice curtailed in 2015. This would involve either submitting detailed reports or making annual declarations.
Additionally, concerns are being raised if managers making unilateral client money decisions should concurrently hold compliance officer roles – a potential conflict particularly challenging for small firms.
The SRA’s thorough consultations aim to ensure ethical handling of client funds while safeguarding both firms’ and clients’ interests.
