The SRA is shaking up the use of client accounts

The Solicitors Regulation Authority (SRA) is in the middle of its endeavour to reduce what are seen by some as overzealous and burdensome regulatory requirements. In yet another step towards achieving this, the regulator has released
a further consultation paper which explores an alternative to the use of client bank accounts.

At present, the entire basis of the SRA Accounts Rules is that if
a solicitor practice holds client money, then it must operate at least one client bank account. This is unless the client money
is always dealt with outside of
client account as prescribed
by other specific rules. Given
this all-embracing rule, the suggestion that there might
be an alternative to the use
of a client bank account is
a radical notion.

The overarching objective of the Accounts Rules has always been to ‘keep clients’ money safe’. So, what is the suggestion by the SRA which it foresees would meet this same objective?

Proposed alternative

The proposal is that the SRA would ‘allow authorised entities to use third-party managed account facilities’, which means ‘an escrow-style service’ whereby the funds are not held directly by the solicitor practice and ‘dual authorisation on the part of the consumer and practitioner’ would be required in order to access the funds held. Similar procedures are operated in France and by the Bar Council.

This sounds like a simple concept, but, of course, the SRA has stipulated some features of the third party managed accounts which it deems desirable. Some of the basic features include:

• The third party must be independent of the other parties;
• The account is held at a specified bank or building society within England and Wales;
• The funds are held separately from other funds of the third party and are held in a specified account, which is clearly identified and held on a basis which will protect those funds on the insolvency of the third party; and
• Accurate records are kept of all transactions and provided to all parties on a regular basis and on the occasion of each transaction.

On the face of it, the basic features are akin to those already provided by the use of a client bank account, so why rock
the boat?

The SRA says ‘client accounts are expensive to run’ and anticipates that a third-party managed account ‘may offer
a lower cost alternative’. Presumably, the suggestion here is that the cost of the services of the third party will be less than the regulatory cost firms currently incur in ensuring they abide by the Accounts Rules.

In theory, there will no
longer be the need to account for all transactions showing
the practice’s dealings with client money – the third party will have to do this. Regular three-way reconciliations will also become a thing of the past, and there is no danger of being accused of providing banking facilities to clients. However, for what the practice gains in time, will it lose out in convenience?

Administrative burden

At present, a solicitor can request and hold client
money on account to settle disbursements or future bills. Once the billing rules have been adhered to, the solicitor has the ability to withdraw funds from client account to office account for payment. Control over
work in progress therefore lies in the hands of the practice.

Presumably, under the new proposals, it would be the case that both the solicitor and the client will have to make contact with the third party in order to release the funds. This may result in more fee disputes
and delays in fee recovery, so would it be fair to say that there could be concerns over the
ease of recoverability of work
in progress?

Additionally, where necessary, the solicitor currently has the ability to transfer funds between two clients of the practice easily, perhaps because they are acting for both the seller and purchaser of a property. Suddenly, the involvement of a third party is required, surely, therefore, adding to the administrative burden for such transactions. Furthermore, the amount of third-party involvement needed to transfer funds up a long chain of conveyancing transactions across a number of solicitor practices will surely make the process more complicated and increase the scope for error.

Of course, there is no certainty as to how each practice will be affected by these proposals, but what everyone may agree upon is that these proposals are the most drastic we have seen
in recent times. SJ

Jennifer Martin is a business supervisor at Kreston Reeves

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