Regulators set on abolishing client accounts

Sir Michael Pitt, the recently appointed chairman of the LSB, has written to all of the frontline legal regulators, suggesting that new ways be found to avoid the need to hold client money. At the same time, the latest EU draft money laundering directive favours getting rid of “pooled accounts” for lawyers. Similar ideas have been discussed in regulatory circles for the last 20 years, but there are reasons to think that this time something might actually give.

Regulatory chairs of all the main legal regulators met on
2 October. The meeting was hosted by Sir Michael and discussed areas for collaboration in legal deregulation, the agenda set for the LSB by ministers, which is supposed to eventually lead to a situation where the LSB itself is abolished. Relations between the regulators, which are often a little strained, seemed to be cordial on the day, and the meeting was followed up by a public letter from Sir Michael setting out potential areas for reform. Included in this list was an objective for the “LSB to convene a meeting of the regulators with a view to collaboration on identifying effective business models to avoid the holding of client money”.

Many of those who have worked in legal regulation would say that it is the holding of client money by practitioners which gives rise to many of the most significant, and costly, problems that beset the sector.

International criminals

The various forms of abuse result in large numbers of claims under professional indemnity insurance (PII) and the Solicitors’ Compensation Fund. Because the idea of lawyers holding client money is alien to many European jurisdictions and because the UK is a major world financial centre, access to UK solicitors’ client accounts is a much sought after facility for international criminals.

In the past, regulators have backed away from the idea as too big, too difficult and too unpopular to be viable. It is interesting that the LSB meeting was between chairmen, not their senior staff. The chairmen are much more likely to see this as a new and important initiative than their senior staff, many of whom would inwardly groan at the concept.

The EU money laundering directives have long been a source of major worry for lawyers and the draft fourth directive maintains that tradition.

There is a change from the third directive with respect to what are called “pooled accounts”, which we would call client accounts. The third directive dealt with this issue by disallowing pooled accounts run by independent legal professionals.

However, the fourth directive sets out to abolish this exemption. Some EU officials appear to think the current exemption is too loose and risky. The proposal is that member states will be left to determine which areas are lower risk and able to claim exemption. The Law Society, unsurprisingly, argues there is nothing wrong with the current system. If the UK government was to take an opposing view, then solicitors would have to open a separate client account for each individual client for whom money was held. That account would need to be closed after the money was eventually transferred out of it. At best this represents a lot more time and effort for solicitors; at worst it means that holding client money might not be worth the effort.

These two lines of attack on client accounts come from entirely different sources. There are also different views of what the “risk” is in the client account context. The SRA, with its entire regulatory strategy now underpinned by a particular view of risk, may accept the LSB initiative as attacking one of the biggest financial risks of all – the abuse of client accounts. If the regulator can’t manage the problems caused by that risk, the SRA may choose to eliminate the problem and abolish client accounts. SJ

Stuart Bushell is managing director of SIFA