Once again, client money is back on the regulatory agenda for solicitors. After several high-profile firm failures and sustained pressure on the Compensation Fund, there is renewed scrutiny on how client funds are held, protected, and managed.
Against this backdrop, the Solicitors Regulation Authority (SRA) has concluded a series of consultations on the subject. While not every detail has been finalised, the overall direction is becoming clearer. This article is intended as a practical explainer – not to raise concerns unnecessarily, but to help firms understand what is likely to change and how to prepare in a sensible, measured way.
Why now?
Believe it or not, the starting point for the SRA’s work is not change for its own sake. Instead, the consultations reflect growing concern about consumer protection and systemic financial risk. Recent interventions have led to large claims on the Compensation Fund, while higher interest rates have altered the dynamics of client accounts; increasing both balances and the scrutiny that comes with them. Alongside this, there is a wider question about whether solicitors should continue to hold client money in all circumstances, particularly where alternative payment models now exist.
Taken together, these factors suggest to the industry that it should focus on prevention rather than remediation, reducing the risk of failure before it occurs.
Consultation 1: Holding client money
The first consultation sought to tighten expectations and remove existing grey areas around the holding of client funds. Key points highlighted by the SRA within this consultation included:
- Clearer boundaries around holding client money.
- Greater focus on residual balances and unclaimed funds.
- Increased attention on interest calculations and allocation.
For solicitors, this points to less tolerance for informal or legacy practices. Administrative pressure around reconciliations and residual balances is likely to increase, and firms will need clearer internal policies supported by stronger financial controls. For Compliance Officers for Finance and Administration (COFAs), the work will be in ensuring that procedures are not just documented, but consistently and accurately applied across the firm.
Consultation 2: Client money and the delivery of legal services
The second consultation explored a more fundamental question: whether solicitors need to hold client money at all, and if they do, the parameters for when they should do so. This consultation does not suggest an immediate end to client accounts, but it does indicate a possible future shift away from holding client money as the default position. Key points covered by the consultation included:
- The potential for third-party or direct payment models.
- The uneven risk profile across different legal services.
- The role of modern systems in reducing financial exposure.
For firms, particularly those involved in high-volume work like conveyancing, this raises important operational and cash flow considerations. Where client balances play a role in working capital, alternative models could have a very tangible impact. Clear separation of office and client funds, supported by robust systems, will become even more important.
Consultation 3: Delivering a sustainable Compensation Fund.
In the third consultation, the SRA was open about the pressure the fund is under and the view that current arrangements may not be viable, long term. The consultation explored fairer contribution models, models linked more closely to risk profile and firm activity, alongside a continued emphasis on prevention rather than addressing failures after the event. Key takeaways from this consultation included:
- Acknowledgement that the fund is under strain and reform is needed.
- Future contributions may be more targeted.
- Strong governance and activities to prevent mishandling reduces long-term regulatory cost.
For solicitors, this brings financial governance into sharper focus. Regulatory risk increasingly carries a direct cost, not just through insurance premiums but through levies and contributions. Firms with weaker controls or higher risk profiles are more likely to feel the impact.
Impact on firms
One ‘final’ consultation on how firms hold client money remains open – and the detail on this one give us a clearer idea of what the SRA are going to implement based on all the feedback collated in these consultations. They’ve settled on the three following policy positions:
- Advanced fees: The SRA is not pursuing being more prescriptive about how much money firms can request in advance of work being done and the circumstances in which they can request it.
- Moving money from client account to office account: A number of changes will be made to the Accounts Rules, namely that firms can only transfer client money to the office account once a bill or written notification has been produced of costs incurred.
- Residual balances: No tangible changes will be made; however, language within the rules will be reviewed to improve clarity and compliance.
To make the matter even more frustrating, the Ministry of Justice has now opened a controversial consultation into client account interest, which would see the MoJ claim 75% of the interest[1] on pooled client accounts. We’ll keep legal clients updated on the outcomes of these in due course.
The big takeaway for firms, however, is clear. Firms should expect less flexibility, as well as greater consistency and precision in how client money rules are applied. You should be prepared for administrative activity to increase before the industry settles into a new regime. If your firm has historic practices in place that don’t prioritise record keeping and ensure compliance, you might soon find that they’re no longer fit for purpose. Partners and COFAs will also need better visibility and reporting, so it makes sense to prepare now.
Necessary action
Although the final outcomes of these consultations have yet to be decided, there are things you can do now, if you’re prudent. Reviewing client account processes and residual balance policies, stress-testing systems against tighter interest or reporting requirements, and understanding how potential changes could affect cash flow and profitability are all worthwhile exercises. If at all unsure, engaging early with qualified advisers who understand the legal sector can help your firm to navigate these changes in good time.
At Foxley Kingham, our work with the legal sector goes beyond technical compliance. Having worked with law firms for over 50 years, we understand the need to assist with the ‘bigger picture’ regulation and the impact this has on accountancy processes. That’s why we’re well-versed on efficient structures and reporting, technology, and the Making Tax Digital transition – for our clients, acting as a proactive adviser rather than a reactive one. As regulation tightens, financial clarity and confidence will become an operational advantage.
The regulation of client funds has undoubtedly entered a new phase. While change can be intimidating and inevitably brings change and upheaval, it also presents an opportunity for firms to strengthen their governance, improve transparency, and reduce any risks for the future. Thoughtful preparation now will make that transition considerably smoother. And we’re here if you need help.
[1] https://www.legalfutures.co.uk/latest-news/ministry-of-justice-unveils-plan-to-plunder-client-account-interest