Solicitors Regulation Authority consultation – all law firms to be affected by potentially major changes

All solicitors need to be aware of the potential regulatory changes being considered by the SRA. The proposals go so far as to discuss the possibility of law firms ceasing to hold client money, as well as removing the ability of law firms to earn interest income from client funds, a significant source of income which many firms may rely on to cover their administrative costs. The ramifications of these potential changes are therefore significant.  

Following the consumer protection review, which was released in February 2024, the SRA have now issued their consultation surrounding the safeguarding of client money and the compensation fund.  

A number of proposals and considerations for the legal sector are covered in their extensive consultation, for which the SRA are requesting feedback. Some of the key issues, which we feel are potentially the most likely to have the greatest impact on solicitors and solicitor practices, are highlighted below.  

The consultation begins by considering the model of client money: 

• Residual balances – potential for prescribing a timeframe of 12 weeks after the conclusion of a legal matter to return excess funds, with a possible extension of a further 12 weeks in specific difficult cases. 

• Interest – considering preventing firms from earning interest on client funds (subject to de minimis), although many firms are reliant on this source of income to remain viable. 

• Transfers from client to office – potentially only to be allowed once work is completed and written notification sent to clients.  The proposed December 2022 amendments to rules 2.1 and 4.3 and the introduction of rule 4.4 will also be going ahead.  

• Advance fees – considering prescribing when it is appropriate to request advance fees, as well as possible a maximum amount. 

• Alternatives for holding client money – considering whether it is necessary or desirable for legal firms to hold client money at all, given the availability of alternatives, and therefore are proposing more movement towards TPMAs in the longer term.  

The consultation then goes on to consider the best ways to identify problems with holding client money in part 2: 

• Improving oversight – possibilities considered here include perhaps increased requirements for notifications to be made to the SRA in certain circumstances, and possible additional requirements regarding mergers and acquisitions.  

• Dormant firms – possible revocation of authorisation after 12 months of zero turnover (without just reason). 

• Accountants reports – there are a wide range of considerations here including, periodic change of reporting accountant, and changes to submissions and annual declarations. They are also considering the exemption requirements. 

• Strengthening checks and balances – possible changes to criteria and potential restrictions relating to COFAs and COLPs.  

Finally, in part 3 they consider the compensation fund, and a number of options for alternative models, bases for calculation, and caps. In the short term, they are proposing for the 25/26 contributions to be based on a 70/30 split between individuals and firms which, they argue, is more representative of the current composition of the sector.

Should you have any questions, concerns about the proposals and their potential impact, or if you would like to be involved in our response to the SRA, then please do not hesitate to contact us.