In Industry Insights

By Sophie Cisler

Building on the previous article, this piece will break down the second and third parts of the current SRA consultation about client money. The previous article (available here) ran through the questions about holding client money. This article will focus on the two remaining parts of the consultation: questions about protecting client money, and about the future of the Compensation Fund.

Protecting client money

The focus of this section of the consultation is a bit broader than you might originally think. Protection of client money is not just what might seem obvious (put it in a client bank account, only use it appropriately) but goes further, including thinking about the wider plans of the business and the powers of people within that business.

Here are the questions the consultation asks you to consider:

Law firm strategy and business plans (questions 1-5)

  • Subtext: should the SRA be doing something to scrutinise what law firms are actually getting up to in terms of their business strategy? (Axiom Ince being the elephant in the room here).
  • Share your views with the SRA:
    • What you think about the information provided to the SRA in terms of what your firm is actually doing, and envisaging. Should you be telling the SRA if you are intending a merger or acquisition? What sort of information should be provided? What about other changes – perhaps you are taking on a new area of work?
    • Should the SRA pre-approve certain changes? What they also want here is to understand practical experiences of what happens when law firms have notified changes to other bodies, such as your insurer.
    • There is likely to be some concern from the profession about whether such a proposal could stymie mergers and acquisitions which are often done at short notice. But if you agree that the SRA ought to have the opportunity to look at some deals before they are signed on the dotted line, can you suggest in what circumstances this should happen, or what sort of information could be provided? Business plans would seem an obvious suggestion, as would financial models, input from accountants and so on.
    • Questions 4 and 5 are relatively niche questions about dormant law firms. The SRA is planning to take action to close these down if they have been dormant for more than 12 months without a legitimate reason. Do you have a dormant law firm? Is there any reason for keeping it open?

Accountants’ reports (questions 6-8)

  • Subtext: Was removing the requirement to ensure all firms sent us their accountants’ report not such a good idea in hindsight?
  • Share your views with the SRA:
    • Which of their proposals about accountants’ reports do you agree with? They offer three options:
      1. All firms who obtain accountants’ reports need to submit them to the SRA, regardless of if they are qualified or not;
      2. Reporting accountants need to declare to the SRA that they have completed a report for X firm, and whether there were any issues;
      3. The firm itself needs to declare that they have obtained the report.
    • Let’s be honest here – is option 3 really a robust option? If you’re not obtaining an accountants’ report and you know you ought to be, are you really going to feel qualms in telling the SRA you have?
    • Whether you think it is a good idea for firms to have to change their reporting accountants periodically. This suggestion is looking at the possibility that perhaps some firms and their accountants are a little too friendly – is your accountant possibly giving you an easy ride? Should firms be forced to change their reporting accountant every few years?
    • Whether they should remove the exemptions from having to submit an accountants’ report. These are relatively technical, for example if you only hold certain limits or only Legal Aid Agency Money – but if you are an exempt firm, tell them whether or not you think it is right to remove the exemption.

COLPs, COFAs and client money (questions 9-10)

  • Subtext: is stopping COLPs and COFAs from making unilateral decisions about holding client money going to stop people nicking it?
  • Share your views with the SRA:
    • How it works in your firm. Smaller firms are much more likely to have a structure where a compliance officer also has the power to direct the transfer of client money – but have you self-imposed some checks and balances? Many small firms will impose dual authority just to make sure that one bad actor can be stopped;
    • What the ramifications would be for your firm, and whether such a proposal should apply to all firms.

COLPs and COFAs – support packages (question 11)

  • Subtext: do COLPs and COFAs actually know what they’re doing?
  • Share your views with the SRA:
    • What sort of support would be welcomed for COLPs and COFAs. Is it SRA-sanctioned training courses? Is it a knowledge bank of resources? A specific qualification? How about elements of safe harbour – if a compliance officer seeks advice on a matter from the SRA, can this protect them if they follow it?
    • If it’s training, what sort of areas? Is it breach reporting, conflicts, data protection, AML…?

The Compensation Fund

 The Compensation Fund is a discretionary fund of last resort. It is designed to provide compensation to clients where money may have been stolen or where insurance will not cover the loss. In practical terms, it is likely only to be available to clients who have been wronged by smaller law firms because insurance will generally cover wrong-doing unless it can be proved that all of the partners were complicit.

The Compensation Fund is financed through our Practising Certificate renewals. Part of both the firm’s contribution and the individual’s contribution (which is generally paid for by a firm if an individual is working in one) goes towards the Fund. Currently, the split is 50/50.

Here are the relevant questions addressed by the consultation:

The split between the firm contributions and the individual contributions (questions 1-2).

  • Whilst the contribution is currently split equally between the firm and the individual, the SRA is proposing to split the contribution at 70% for the individual, 30% for the firm.
  • Share your views with the SRA:
    • Does this make sense? Will it actually change anything? Are you an individual who works in a firm but still pays for their own Practising Certificate – in which case you will be affected?
    • If you are a consultant or freelance, what impact would this have on you?

A differential model for contributions (questions 3-5).

  • The contributions at the moment are a flat fee (firms who pay for more individuals pay more overall). But is this fair? Should firms who earn more, who hold more client money, who engage in more risky work-types pay more towards the Compensation Fund?
  • Share your views with the SRA:
    • Is this fair? Who would find themselves paying more? If the contributions were based on risk, is a high-street firm offering conveyancing likely to be judged higher risk than, say, a large international firm who specialises in dispute resolution?
    • Are there any other parameters which should dictate how a differential model should be structured?

 Payment caps and limiting claims (questions 6-11).

  • And to end on, some more focused questions looking at the technical detail of how the Fund operates, including whether the cap of £5m on connected claims should be maintained, and whether any claims should specifically be excluded from the Fund.
  • Share your views with the SRA:
    • If you agree the cap should stay or whether a different model should be implemented, such as a flexible cap, no cap at all or guaranteeing compensation up to a specific amount;
    • Whether there should be exclusions for some claims, and what these should be. Remember that the Fund is already discretionary, and there are already limits on, for example, who can apply to it. Is it really necessary to put formal restrictions in place?

Finally…

All parts of the consultation have included a draft equality impact assessment on the Consultation. The SRA wants your feedback on whether they have considered the right things, and in the right way. In particular, the SRA themselves have noted that some of the proposals may disproportionately impact small firms and individuals such as Black and Asian solicitors, solicitors from lower or intermediate socio-economic backgrounds, solicitors aged 45 and upwards and disabled solicitors. Can you add your voice to this important consideration?

Responding to the consultation

The link to respond is here (look for the big red button).

This page also contains the consultation paper as distilled above. The deadline to respond is 21 February.

You do not have to answer every question nor do you have to spend ages wording your answers beautifully. More important is getting it down. Do it in bulletpoints if that’s easier: you just want to ensure your point is heard.

It’s yet another thing to do on a busy day and it’s easy not to – someone else has probably got your experience and will probably respond. But they might not, and it is key that the SRA get as much information and accounts of practical experience as possible.

So please do respond: as the old Dr Pepper advert said, why not make your voice count?

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