The Solicitors Regulation Authority (SRA) recently closed its consultation on potential changes to the handling of client money, sparking widespread debate across the legal profession. The consultation, launched in November 2024, explores fundamental questions about whether law firms should continue holding client money, the rules surrounding interest on client accounts, and the controls and oversight mechanisms in place.
As part of the consultation, the ILFM collated responses from our members and has presented its findings directly to the SRA. The Law Society and Legal Services Consumer Panel have now also published their thoughts on the proposed changes. Read on to learn more…
What does the consultation consider?
The consultation is far-reaching but some of the key areas of interest have been:
The Model of Solicitors Holding Client Money
The SRA's most contentious proposal questions whether law firms should continue to hold client money at all. The regulator is exploring alternatives, particularly Third-Party Managed Accounts (TPMAs), which could fundamentally reshape how legal practices manage financial transactions.
Industry responses have been overwhelmingly against restricting firms from holding client money. The Law Society argues that "client accounts are a fundamental tool for the efficient and effective delivery of many types of legal services," while the ILFM found that 100% of its surveyed members disagree with changing the current model. Responses from our members mentioned the impact on client service levels, delayed transactions, the increased risk to client money being held by a few organisations as opposed to being spread across multiple banking institutions, and an increase in fees.
Wider critics also note that millions of transactions are processed safely through client accounts each year, with only exceptional cases of abuse.
Residual Balances and Interest
The SRA is considering setting a 12-week deadline for returning residual balances within 12 weeks of the conclusion of a matter, replacing the current requirement to return funds "promptly." Where a firm does not have the necessary details to return the money, a further 12 weeks could then be prescribed for tracing owners, and where this is not possible, firms would donate unclaimed funds to charity or apply to the SRA for approval if amounts exceed £500.
70% of ILFM members who responded to our survey agreed that more prescriptive requirements for returning residual balances would be beneficial, but many also mentioned that defining when a matter is “completed” would help, as this can vary depending on the work type. Nearly two-thirds of respondents felt 12 weeks would be sufficient, though others felt that timescales would vary again depending on the work type, and that 12 weeks may not be feasible to return a balance.
Regarding interest on client accounts, the regulator questions whether firms should continue to retain interest earned, suggesting it may not always serve clients' best interests and could incentivise firms to hold funds unnecessarily.
The Law Society contends that the current rules are adequate and that firms are not motivated to hold client money longer than necessary due to increased risk. They suggest that better SRA guidance could address concerns rather than rule changes.
The Legal Services Consumer Panel (LSCP), however, advocates for clear rules requiring law firms to distribute interest to clients in proportion to the amount and duration of funds held, unless the client explicitly agrees otherwise, with clearer transparency requirements about how interest is calculated and distributed.
The majority of ILFM members were against this proposal, due to the potential impact on high volume transactional work such as conveyancing, the impact on smaller firms and the potential increases in fees charged to clients.
Strengthening Oversight and Controls
To enhance client money protection, the SRA proposes the following options:
Reintroducing mandatory submission of all accountants' reports for non-exempt firms
Requiring reporting accountants to submit annual declarations
Introducing annual declarations for firms regarding their accountant's reports
Potentially requiring firms to periodically rotate their reporting accountants
ILFM members were equally split between preferring the options of 1 and 2, with fewer keen on option 3 - for firms to provide an annual declaration.
50% of respondents felt the requirement for firms to periodically change their reporting accountant would be unnecessary. Members commented that it would increase costs (especially for smaller firms) and that not every qualified accountant is experienced to undertake AR1 work. Furthermore, it was commented that it is useful to have reporting accountants who understand your business, but it is still important to safeguard that independence.
The other 50% of members who answered commented that it could be possible, although there were concerns over the lack of reporting accountants who have experience or knowledge of the SRA Accounts Rules.
The Law Society supports the reintroduction of a mandatory accountant's report submission for all firms holding client money and improvements to the SRA's authorisation processes but opposes the rotation of reporting accountants, citing difficulty in finding alternatives and unnecessarily adding to costs.
Other Industry Perspectives and Concerns
Law Society Response
The Law Society also emphasises that the client account system differentiates solicitors from other professional services and unregulated providers. They argue that restricting the ability to hold client funds would adversely affect the range and quality of services provided, causing delays and increasing legal costs for consumers.
They also dispute the SRA's suggestion that Professional Indemnity Insurance costs would be reduced by firms not holding client money, noting that premiums are driven by work type, negligence matters, and claims history rather than the holding of client funds.
The ILFM members perspective
When it came to the proposal to impose a rule that any manager that can unilaterally make decisions that impact client money handling should not also be allowed to hold a COLP or COFA role, our members raised concerns about the disproportionate impact this may have on smaller firms, if external compliance support becomes mandatory. While they support more regular training for compliance officers, they question whether the SRA's "one size fits all" approach remains fit for purpose given the substantially different challenges faced by large corporate law firms compared to small practices. Members also commented that no manager or any other individual should be able to unilaterally make decisions that impact client money handling in any case.
LSCP Critique
The LSCP offers the most critical assessment, stating they have "no confidence that the current framework and rules offer adequate consumer protection against the misappropriation of clients' money." They reference the collapse of Axiom Ince, which left tens of millions of pounds of client money unaccounted for, as evidence of inadequate regulatory frameworks.
The Panel has also criticised the SRA for consulting on client accounts five times since 2015 without implementing meaningful reforms and for focusing disproportionately on residual balances and interest rather than addressing the core issue of misappropriation.
Moving Forward
As the legal sector awaits the SRA's next steps, firms should prepare for potential changes to their financial management practices. While these reforms may introduce challenges, they also present an opportunity to modernise operations and strengthen client confidence.
The consultation reflects a broader regulatory drive toward enhancing transparency and consumer trust in the legal profession. However, finding the right balance between consumer protection, operational efficiency, and proportionate regulation remains the central challenge for the SRA as it considers its next steps.
To read the responses from the Law Society and LSCP in full click on the links below:
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