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Law firms shouldn’t keep interest – SRA

The Solicitors Regulation Authority (SRA) has suggested that law firms in England and Wales should not be able to profit from holding money on clients’ behalf.

The proposal came as the SRA launched a wide-ranging consultation on consumer protection.

According to the Law Society Gazette of England and Wales, the regulator is considering whether to change its rules to prevent firms retaining any interest earned on client money.

‘Fair sum’

In research carried out this year, the SRA said that it had not received any compelling evidence of how firms retaining any interest is in the consumer’s interest.

The SRA accounts rules require firms to pay their clients a ‘fair’ sum of any interest earned on client money, but the Gazette says that there is no definition of what ‘fair’ means in practice.

Members of the public told researchers that they considered that a ‘fair sum’ meant receiving all of the interest that their money earned, but that they would consider allowing interest to be used to reduce legal fees.

Costs

According to the Gazette, the Law Society of England and Wales’s most recent financial benchmarking survey estimated that firms could have made as much as Stg £27 million total net income in interest on client money in 2022/2023.

The SRA said that some firms had reported that they could keep costs down by retaining some of the interest earned on client money, improving affordability and therefore access to legal services.

Some small firms told the SRA that they relied on interest from client funds to remain viable or retain staff, especially in price-competitive areas such as conveyancing. Larger firms also reported increased profits because of client interest.

Large sums

“We are concerned that, particularly with large sums of money, the potential financial benefit may be driving behaviours that are not in the interest of clients,” says the SRA consultation.

“And we do not think it is appropriate for firms to continue to profit from holding money on behalf of clients,” it added.

In the short term, the SRA proposes to ensure that money held on behalf of clients to pay for legal fees is not transferred into the firm’s office account until it is “appropriate” to do so.

There is concern that the current rules on transfers offer too much flexibility about when money can be moved to the office account.

A longer-term project is to look at whether firms should be able to hold client money at all. The SRA states that at present, the market for third-party alternative methods is not there.