The Solicitors Regulation Authority (SRA) has announced significant proposals to change how law firms manage client funds.
- The proposed reforms include prohibiting the retention of interest by law firms on client money.
- Firms may be required to return client funds within 12 weeks following the conclusion of a matter.
- The SRA is considering stricter guidelines on how much money can be held in advance by law firms.
- These changes aim to align the handling of client money with consumer interests and transparency.
The Solicitors Regulation Authority has put forward a series of proposals that, if implemented, will profoundly alter how law firms handle client money. At the core of these proposals is the intention to cease allowing firms to retain interest accrued on client accounts, a practice which has traditionally subsidised operating costs or improved profitability for some firms.
Currently, about 7,000 firms have declared holding client money, with a range of amounts from under £100,000 to over £1 billion. The SRA suggests that firms return client funds within 12 weeks post-case completion, with an additional 12 weeks available for making reasonable attempts to trace the client if necessary. If funds remain untraceable, the firm may donate them to charity or follow specific application procedures for amounts above £500.
There is a mounting concern about the incentives that motivated firms to hold client money, which might not reflect the best interests of the clients. The SRA’s research noted that clients prefer receiving interest from their funds, asserting that interest rates should mirror those they might receive in personal savings accounts.
Parallel practice in jurisdictions such as Canada, France, and Australia sees interest from client accounts supporting pro bono services and legal education. The SRA is contemplating whether a similar model could be viable, although it would redirect funds away from clients themselves.
The proposals also include potential amendments to rule 2.3(c) of the accounts rules, which currently permits alternative arrangements for handling client money. However, such flexibility could compromise clients’ interests. For instance, if a firm faces insolvency or abrupt closure, client funds may not be adequately safeguarded.
In recognising the practicalities of legal work that spans extended periods, the SRA has indicated that its proposals will not discourage firms from offering fixed fees. The proposals suggest adaptation towards models where fees correlate more clearly with work phases or periods.
Finally, the SRA seeks more precise regulation on the funds requested in advance by firms, addressing instances where clients’ payments were greater than necessary for the case. This aims to prevent excessive advance fees and ensure alignment with the anticipated legal service costs.
The SRA continues to evaluate these proposals with a focus on enhancing client protection and ensuring fair practice in law firms.
