The abolition of client accounts, inspections without suspicion of misconduct, increased fining powers, more transparency obligations and a review of legal services. No one can say that the coming years will be without its moments of interest for the legal profession. However, are we in danger of being over regulated to the extent that we can no longer function as businesses? Are the demands of the consumer lobby about to have the opposite effect and reduce access to legal representation? Are solicitors going to be rendered ineffective by the abolition of client account – and have no illusions, when delays in the system occur, we will be blamed? If you put unlimited pressure on a sector, then you will eventually kill off that sector and the closer we get to that point with general practice the closer we will get to the breakdown of society.
Infolegal does not often climb on a soapbox, but this time we feel that there are things that considerations that need to be aired. As Law Society President, Nick Emmerson, stated last year “A strong legal services sector underpins a strong economy across the board”. Our legal services sector enjoys an unparalleled reputation abroad and is an economic powerhouse, worth £60 billion annually to the UK economy. Curbing the ability of lawyers to offer a full and effective service to clients, for example by the abolition of client accounts, will damage that reputation. Government may not like a strong legal sector because lawyers call its actions into question. That is no reason to render it ineffective or to allow those who report to government to do so.
Introduction
It is not uncommon for solicitors to feel under attack for one thing or another and to wonder when they are supposed to find time to carry out client work amidst the barrage of regulatory and legal duties to which they are subject. Whilst it would be good to report that the tide was turning, and that their regulatory obligations and threats of sanctions, were going to diminish, regrettably we cannot. Indeed, the past few weeks have brought a plethora of proposals and plans that could make the practice of law even more difficult and less rewarding for many small to medium sized practices.
Much of this, it has to be said, is emanating from the solicitors’ own regulatory body, the Solicitors Regulation Authority, who seem determined to render the legal profession an endangered species. However, they are not alone, and others including members of the House of Lords, the Lord Chancellor, the Legal Services Board and the consumer lobby all seem equally determined to make the practice of law so difficult, and so beset with penalties, that one could forgive those who decide that the law is too precarious an occupation and opt instead for the safer option of becoming lion tamers.
Inspections and Fines
The current round of assaults on the profession began with the call by the SRA for the power to launch “wide sweeping inspections” of law firms without there having had to be any allegation or suspicion of misconduct on the part of the firm. The request was made by SRA Chief Executive Paul Philip whilst giving evidence to the House of Lords Communications Committee, during which he also called for increased fining powers. Needless to say, the call for increased fining powers found favour amongst those peers who are always alert to a bandwagon upon which they can jump, and the controversy over law firm involvement in strategic litigation against public participation (SLAPPs) proved to be the very band wagon they were seeking.
Baroness Stowell of Beeston, the chair of that committee, felt that the SRA should have the power to impose far higher fines on firms than they currently can, and stated that the SLAPPs bill currently going through Parliament offered “a rare and valuable opportunity to enable the regulator to impose fines that actually deter wrongdoing and stop law firms from profiting from SLAPPs cases” and who commented also that the current limit of £25,000 “is very small given the overall turnover of these firms”. Clearly the belief that all law firms are making vast amounts of money is still current in the House of Lords. One cannot help but worry that once the SRA gets a taste for imposing higher fines in SLAPPs cases, it will want those powers extended to other issues.
Review of Legal Services
Which brings us to the next Lord who may, or may not depending upon the outcome of the future elections, make life interesting for lawyers. Alex Chalk, the Lord Chancellor, has stated that there is a growing case for a review of the regulatory framework brought about by the Legal Services Act 2007 and is looking at an appropriate time for a review to be undertaken. The call for a review follows in the wake of the Post Office Horizon fiasco, which is probably set to become the basis for many more attacks upon those in the law, and the comments were in response to those from the justice select committee which believes that “the needs of consumers are not being met as much as they should be”. Amongst the targets for Mr Chalk could be the SRA, CILEx and of course the Legal Services Board.
Transparency and Consumer Choice
On the subject of the Legal Services Board, they are once again beating the drum for empowering consumers to be able to make effective choices when selecting law firms to represent them. They have even given a warning to regulators over the possibility of enforcement action unless they speed up the process of “developing quality indicators to help consumers choose lawyers”. This would allow consumers to shop around for the cheapest (although probably not necessarily the best) deals.
The dreaded word “transparency” has is much in evidence here so it is not unreasonable to expect firms facing more rigorous policing of the current Transparency Rules and the possibility for the expansion of those rules into other sectors of work, or a tightening of the requirements placed upon firms in relation to it. Either way, it will be unlikely to be good news for law firms – especially if the SRA acquire the power to levy higher fines.
Abolishing Client Account
Next, it would appear that the SRA is ramping up its plans to have client accounts abolished. This is not the first time that client account abolition has been suggested. This time, however, the SRA has the example of the Axiom Ince case to back up its claims that solicitors are not fit to manage their own client accounts and that instead they should be outsourced to escrow accounts or Third Party Managed Accounts (TPMAs). That was essentially the message that was given by Paul Philip to a zoom conference hosted by Legal Futures on the 22 May and entitled “The future of regulation: should solicitors continue to hold client money?” In his remarks, Mr Philip claimed that by abolishing the right for solicitors to hold client accounts the costs of regulation would be reduced, the public would be made to feel safer, cybercrime would become a thing of the past and that somehow, although it is difficult to see that this would be the case, AML requirements would be reduced. Needless to say his claims did not go without some degree of opposition from those attending the conference.
In fairness, these proposals are not completely new, even this time round. They do feature in a well-hidden discussion paper on the SRA website entitled “Protecting the public: our consumer protection review” and published by the SRA in February 2024. In that discussion paper the SRA cite the Axiom Ince intervention, and argue that because that happened consumers are feeling less secure, that risks exist, that there is pressure upon the compensation fund and that consumer protection measures may not be sustainable.
Along with discussing options for the compensation fund, the SRA propose that there are a number of options that need to be explored, including:
- Enhancing their risk identification process and to use the intelligence they collect to identify problems before they get out of hand – i.e. become more interventionist in the general sense of the word.
- Strengthen checks and controls – including greater checking of business plans, funding plans and governance structures and checking with other organisations such HMRC for high-risk firms
- Bolstering monitoring and supervision – the “wide sweeping inspections” referred to earlier.
- Putting in place structural firm controls – preventing a small number of individuals controlling management decisions – putting power in the hands of compliance officers.
- Assessing ownership models and corporate structures for issues such as sustainability, risk and transparency.
The most controversial of those plans, however, is that of the proposed targeted controls around client accounts and client money. These could include:
- The abolition of client accounts in favour of some form of managed account, if not for all firms then certainly for those firms or business models seen to present a higher risk.
- Reviewing the way in which money is taken up front.
- Reviews of the ways in which client account residual balances are handled.
- Reviews of the interest that firms can retain on client funds held in client accounts – note that there is a view within the SRA that all interest retained by firms is wrong and that firms are somehow profiting hugely from their client accounts.
- Increasing the requirements in relation to accountants reports.
Everyone is urged to read the discussion paper which can be found on the SRA website (https://www.sra.org.uk/sra/consultations/discussion-papers/consumer-protection-review/) and to respond by the deadline of 1 July 2024 to help make sure that any proposals that are carried through are practical, workable and proportionate. There is always a danger that the solution of curbing client accounts is actually more damaging than the problem it is designed to remedy. More to the point, there is an argument for saying that the problem of solicitor dishonesty in relation to client accounts is one that has arisen as a result of the continual opening up of the legal sector to almost anyone who thinks they can be involved, whatever their background, skill, experience or ethical basis. This is as much the fault of the consumer lobby who constantly undervalue the skills that trained lawyers bring and push for greater access to legal services without questioning the ability or suitability of others to deliver those services. This is similar to allowing open heart surgery to be performed by those who have undertaken a first aid course, or worse still, those with a good line in snake oil.
Are we an endangered species?
In summary, it has to be said therefore that the immediate future is unlikely to be one in which firms can feel less put upon by regulation. What it also means is that firms that do not comply with the regulations are going to find that they are far more likely to have their collar felt by an SRA keen to do the bidding of government and the LSB.
Yes, there has to be regulation. Yes, those who transgress need to be called to account. Yes, firms need to manage themselves and the work they do for their clients more effectively. BUT, and it is an important BUT, don’t regulate the profession so strictly in the supposed interests of the consumer that the profession to all intents and purposes disappears, and can no longer represent the interests of the ordinary person. If the costs of regulatory compliance, or the costs of consumer-focused requirements by firms, increases overheads too far, then costs will rise and the ordinary person will be even less likely to be able to afford legal representation than they are now . Solicitors are businesses. They need to make a profit in order to survive and if they cannot do so because they are spending too much time on regulatory compliance, then they will cease to be effective. It is vital that regulators lose the mindset that all law firms are self-serving and that profit is a dirty word.