The SRA has today published groundbreaking plans to persuade law firms to switch to third-party accounts as an alternative to client accounts.
The regulator includes the proposal in a consultation on further reducing the red-tape burden on small firms, stressing that misuse of client money is a ‘consistent risk to consumers’.
Current rules contain a set of principles designed to keep client money safe, primarily through the operation of client accounts.
But a number of recent cases related to the misuse of money or assets – combined with successful models run by the Bar Council and in the French legal system – have led to growing calls for change.
The SRA proposes two options. It would either approve all specific third-party managed accounts, or take a hands-off approach provided safeguards are in place. The regulator prefers the second option to remove a layer of decision-making and complexity.
Client accounts are expensive to run, both for firms, and in terms of investigations and compensation where there has been misuse.
‘The use of third party managed accounts may offer a low-cost alternative that continues to provide appropriate protection,’ said the regulator.
‘Consumers, meanwhile, do not necessarily require their money to be held by lawyers, where funds can be disbursed directly from bank to bank.’
The solicitors profession has previously regarded the client account as sacrosanct, not least because of the financial benefits from interest payments. But rock-bottom interest rates have made some firms less inclined to take on the risk of holding client money.
In December, the Gazette revealed that the Bar Council’s escrow provider, Barco, had secured agreement with the SRA to offer its services to solicitor firms.
The relaxation of account rules is likely to come into force in November, although the SRA will consider requests to use third-party arrangements on a case-by-case basis before then.
A Law Society spokesperson said: ‘We are interested in proposals that reduce burdens on solicitors.
‘It is not clear to us that these arrangements will necessarily improve consumer protection or reduce risk, but we will be studying the proposals closely.’
The SRA also makes a range of further proposals for reducing regulatory burdens.
Proposed changes include removing the requirement for small firms separately to nominate compliance officers, removing the need to approve individual managers within ABS corporate owners, and allowing firms to decide how they record non-material rule breaches.
The SRA may also relax the rule that gives it the right to enter a third party’s premises, which was raised as an issue by firms wanting to outsource new technologies such as cloud computing.
The regulator also seeks views on the current ban on paying referral fees to introducers for customers who are subject to criminal proceedings.
Changes to insolvency rules are proposed which will ensure that the SRA can refuse or impose conditions on a practising certificate renewal application from partners of a firm that has entered administration but not yet been subject to insolvency or bankruptcy.