Merete Poulsen BSc MSc ACA
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View all peoplePublished by Merete Poulsen on 23 October 2024
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The Solicitors Regulation Authority (SRA) has recently launched a consultation with the aim of better protecting consumers, or clients, of law firms.
The consultation, triggered by the collapse of Axiom Ince, is wide ranging looking at both the SRA’s compensation fund and how similar collapses of law firms might be prevented.
In doing so, it asks for responses addressing three separate areas of risk:
We have a strong and growing practice of solicitors firms across London and the South East and has contributed to that consultation.
In the second article we discussed the management of risks surrounding mergers and acquisitions.
In the final article, we discuss the protection of client money.
The SRA are considering a wide range of options here, as far reaching as restricting firms from holding client money in some circumstances. This could be prohibitively restrictive for legal firms, as well as expensive and time consuming to implement. Such an approach could create more questions than answers, given that billions of pounds of client funds are held by regulated firms at any one time. The lack of firms choosing to use TPMA’s illustrates that they are unwilling to relinquish control of client accounts.
Solicitor firms are unlikely to respond well to such a change. Firstly, it would remove the revenue legal firms are able to generate from earning interest on client funds which has increased significantly over the last two years. Secondly, the loss of control when passing on responsibilities to a third party would greatly impact upon how efficiently solicitors can do their jobs, particularly in respect of firms who undertake work in areas of law with tight deadlines, such as conveyancing. Inevitably, this would have a knock-on effect on the end consumer.
Restricting firms from holding client monies could therefore be considered a knee-jerk reaction where there are, instead, instances where the SRA could better use its powers to prohibit or even remove the option of a client account for specific firms deemed to be high risk.
We would instead suggest that, in the first instance, there are a few smaller changes which would help with the protection of client money. These include mandatory submission of AR1 forms, even where they are not qualified. This would ensure that the SRA had confirmation that all firms that need a report have obtained one, and that qualified reports are not being withheld from the regulator. For firms not obtaining a report because they have fallen below the de-minimis limits, annual checks on the mySRA portal could be used to confirm that solicitors have re-considered their responsibilities on an annual basis and have not unknowingly tripped the de-minimis limit.
We would also note that firms were previously required to notify the SRA of their Reporting Accountant (RA) and to inform them of any changes. Under the current Rules, the SRA has no awareness of who the RA is unless a qualified report is submitted. This lack of transparency increases the risk of the required client money examination not being undertaken to a sufficient standard, if at all.
COFA responsibilities are, of course, hugely important to consider here. There should be an increased emphasis on the training and support available to COFAs. There are training courses available online, some of which offer short exams at the end, which can be used to demonstrate the COFAs understanding of their responsibilities. Such training courses could be made an element of mandatory annual compliance for COFAs.
Furthermore, increased emphasis could be placed on the COFA Register of Breaches, ensuring COFAs are assessing patterns and weaknesses in systems and procedures, and taking appropriate remedial action to strengthen the protection of client funds. This is a hugely important tool for firms to utilise if the continued focus is on self-regulation. In our experience, our clients who have robust, regularly updated and reviewed COFA Register of Breaches are able to greatly improve their systems and processes by identifying weaknesses. Those who do not continue to encounter trivial breaches of the client money rules on a regular basis and are at higher risk of reportable breaches occurring.
We do, however, appreciate that sole traders and smaller firms will have difficulties where they are unable to dedicate sufficient resource to the COFA role. Naturally, there will be bigger focus on their fee earner responsibilities. Whilst the smaller firms will be dealing with less clients, they may still be holding significant sums of client funds, so the risk to the consumer must not be ignored. The mandatory training courses and submission of AR1s to the SRA, as mentioned previously, will help to alleviate the inherent risks of COFAs not being able to dedicate the appropriate time to the role.
As practices grow in size, the COFA should then be replaced by a separate, dedicated, person who has the time and skills to dedicate to increased responsibilities in this area. This seems particularly important given that the reliance of self-reporting has unfortunately not ensured the protection of client funds in the case of Axiom Ince.
If you need guidance on how these proposed reforms may affect your firm or support in improving your compliance and risk management, our team is here to help.
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