SRA kicks client account can down the road

The Solicitors Regulation Authority (SRA) has written to respondents to the consultation on the holding of client funds by solicitors to confirm it will not be taking any immediate action on removing client account from law firms. 

In correspondence seen by this publication, the SRA’s executive director of strategy, innovation and external affairs Aileen Armstrong has written to individuals and organisations who submitted a formal response to the client money in legal services consultation launched last year to advise the regulatory body considers there is a case to answer on the model of solicitors holding client funds, but its ‘immediate focus is on making changes to better protect and safeguard client money under the current system’.

The consultation was launched in November 2024 and ran until the end of February 2025. Split into three parts, it explored the model of solicitors holding client money and ways to reduce the associated risks; better protecting that money with appropriate checks and balances; and delivering and paying for a sustainable compensation fund. Critics pointed to the consultation being a knee-jerk reaction to the recent high profile failure of Axiom Ince, a point acknowledged in the consultation background:

“Recently, both the number and size of firms that we have had to intervene into to protect the public has risen sharply, with increasing detriment to clients from client money having gone missing or being unavailable when it was needed to complete a transaction. A substantial proportion of regulatory breaches which we investigate concern issues around the handling of client money.”

One of the main issues surrounding the potential end of client accounts is the end of firms benefitting from the interest it generates, with membership and pressure groups strongly opposed the SRA’s proposals. The Law Society described client accounts as ‘fundamental to the efficient and effective delivery of most legal services’, adding that ‘restricting or banning law firms’ ability to hold client funds would significantly damage the quality of services provided to the public’. Pressure group the Property Lawyers Alliance said the end of client accounts would be an ‘existential threat’ to law firms.

It had been anticipated the SRA would report back in July but it appears it has taken them until now to review the extensive evidence submitted through the consultation responses, with over 450 individual replies along with engagement events and consumer research. In March, the SRA said no final decision had been made and in recent weeks, in view of major concerns regarding legal aid funding, it had been suggested interest on client accounts could be used in part to fund access to justice through an Interest on Lawyers’ Client Account (ILCA) scheme.

For now though, it appears the SRA has taken the decision to kick the client account can into the long grass. In her correspondence, Armstrong explained:

“Our consultation considered steps we could take in the more immediate term to better protect client money. It also asked some big, fundamental questions about change over the longer term in two areas – the model of solicitors holding client money, and the model of funding the compensation fund, which the profession pays for and which protects clients in the event their money held by solicitors is misappropriated.

“We have heard a lot of views, with some appetite for change to address the root causes of risks to client money. However, we have always said these are complex issues, that cannot be solved with quick fixes.

“We consider there is a strong case to properly explore the long-term transformation of the model of holding client money and how the compensation fund is funded.

“However, our immediate focus is on making changes to better protect and safeguard client money under the current system. This is also the focus of the strategic priorities outlined in our proposed 2025/26 Business Plan and Budget and relevant LSB Directions post-Axiom Ince.”

A progress report will be published later this year alongside proposals for consultation in several areas. This is not to say firms can be assured nothing will change: Armstrong concluded the regulator plans to return to the longer term question of solicitors holding client money and the compensation fund, ‘after we have made changes to the current system’, describing any future action as ‘robust’ and based on feedback received to date.

The news will come as some relief for law firms, said Tom Blandford, who acts as a fractional finance director for legal services. 

“Whilst its true to say that many firms earnt money from client interest I personally have always struggled on how much of this was actually profit. For many client matters, the amounts concerned were very small (but happened to add up when multiplied across a firm’s entire client base) and would be dwarfed by the added administration burden of having to return a few pounds back to a client. We could have ended up in the absurd situation of the firm sending a few pounds to the client but charging them significantly more in cashiering services and bank transfer fees. Hardly improving outcomes for the consumer!”

Kirsty Pappin of Aries Practice Management shared the sentiment:

“Today’s news is welcomed by the legal sector, especially for those firms with a high transaction rate with their client accounts. Lawyers and their teams do not need another burdensome layer when dealing with conveyancing transactions. Law firms are already facing increased costs, so being forced to use third-party managed accounts can only bring with it financial stress, delays and administrative complexity. Thankfully the SRA are focusing energies elsewhere and long may that remain the case.”

There is a case to answer, concluded Blandford, where firms are using interest on client account to ‘prop up’ their business. ‘It is also very important that client money is protected and that there are provisions in place for the SRA to monitor that and deal with problems as early and as proactively as possible’ he added.

“But simply removing client interest or client accounts entirely was never the right answer to those problems.”