There’s no escaping the fact that conveyancing firms face a whole host of different issues when it comes to completing any transaction. From dealing with huge peaks and troughs in demand to combatting the risk of fraud and cybercrime, rekeying errors and ongoing client liaison, the challenges are numerous. Treatment of interest gained on client money is the latest issue to be brought to the fore.
The Solicitors’ Regulation Authority (SRA) is looking into whether it should restrict the ability of firms to hold client monies in accounts, stating that it is not necessary, brings a much higher risk of increasingly sophisticated cyber-attacks and money laundering operations, and makes fraud much more likely with a potentially catastrophic impact on the end consumer.
As we pass the first anniversary of Consumer Duty principles introduced by the FCA, this debate is forming part of the SRA’s consumer protection review. There are two dimensions to the discussion. Firstly, the question arises whether conveyancers actually require the holding of funds to facilitate a transaction. Secondly, if they are in possession of these funds, whether they are entitled to the interest accrued on client account as a result.
The simple answer to the first question is no, holding the money is no longer required in a purely practical sense. With the right support and technology that removes the need to handle client money and enable lodgement in one go, PEXA can help eliminate the step in the middle where the money sits in client accounts. The second question is slightly more nuanced as whether or not firms can hold client money, and therefore gain interest on it, is inextricably linked to law firm profitability.
Our recent research in conjunction with Big Yellow Penguin showed that the majority of law firms – over 60% – said interest gained on client accounts contributed towards their profitability on some level. It is therefore understandable that there is some concern about the financial impact of taking away this source of income, especially when conveyancing firms’ margins are under pressure and transactions are subdued by historic standards.
Whether or not conveyancers take interest on client accounts is currently a business decision of the firm, rather than the subject of a third-party discussion. However, the issue for conveyancers is that this is a question on the regulator’s lips and inevitably needs consideration as a result. If the SRA does take action around a firm’s ability to hold client money, conveyancers need to know they have a sustainable business model outside of this revenue. It also makes business sense – interest rates may plummet, or the Ministry of Justice might determine that interest earned must go towards funding other legal services.
While all these variables are undecided, now is the time to take proactive action. There is, for instance a potential business case for increasing fees. It is admirable that conveyancers are doing their best to keep costs low for the consumer, but often conveyancers are underselling themselves. People are moving house less, now only doing so once every seven to ten years. With it often being their biggest financial spend, they are more likely to be happy to spend a little more for a premium and highly specialist service. Charging more understandably causes concern that some market share would be lost, but with rates still high, conveyancers leaving the industry, and client interest still a revenue stream, now is the time to try. There isn’t a one size fits all approach, and it is likely that there will be a bit of trial and error at first, but we need a wave of change to take the industry to a new way of working.
There are benefits of embracing this change, too. Removing firms’ ability to hold money would, in the SRA’s Chief Executive Paul Philip’s words, cause the “cost of regulation to drop like a stone” by drastically reducing the opportunities for fraudsters to steal client monies, with a natural knock-on effect on insurance premiums for firms too. Of course, there’s no getting away from the initial outlay required to implement the right tools and technology to make all of this a reality, but the return on investment has the potential to be significant – firms would also see drastic reductions in operational overheads, and free up time, money and expertise to focus on other parts of the conveyancing journey.
The SRA speaking about this shows that change is coming. It should be seen as a driver of innovation. By capitalising on technology, we can prepare the industry with the necessary tools to adapt to these changes, ensuring that solicitors can continue to deliver outstanding service without the need to hold client money. Navigating this is hard, but it is the role of third-party technology providers to collaborate with the whole industry to solve these types of challenges. PEXA is passionate and committed to doing just that, helping the sector change and grow, not only for the industry’s benefit, but for the benefit of consumers and the wider UK economy too.
3 responses
Are you out of your mind @PEXA? Try telling a client to go to a bank on moving day to transfer monies required for completion (this is required where very large sums are involved). Client account definitely needed. Proper preparation prevents poor performance. Most of us do adhere to the rules. Where someone has criminal intentions they will find a way to do it. Monies in required in advance, even with mortgages. This means some of my completions are done by 10am. Not to mention additional stress to accounts teams.
It’s not going to cause “regulation” to drop like a stone. Solicitors have to behave outstandingly and there is everything else we could get sent to prison for. Such a high and mighty attitude from the SRA who allowed the Axiom Ince debacle to occur and now it is everyone’s fault?
More likely to be nudging on the upcoming changes from BOE. ‘Synchronisation’. Meaning funds transfer out of Conveyancers control (Hallelujah!).
“cost of regulation to drop like a stone” – utter rubbish. The biggest factors in recent years hitting PI premium have been doubling ground rents and buyer funded deposits. Nothing whatsoever to do with us holding client money.
As for a “drastic reductions in operational overheads” – again utter rubbish – we would have to integrate with a third party supplier – actually with multiple third party suppliers who will all work in different ways and who will all charge their own ‘admin’ fees in order to existing. Under these changes the client will get a slower, more complicated, more expensive service.