Should law firms be allowed to hold client money, or should client funds be entrusted to an approved third party to reduce the risk of fraud? This is one of the fundamental questions posed by the Solicitors Regulation Authority (SRA) consultation on client money handling in legal services. Due to close on 21 February 2025, the consultation forms part of the SRA’s wider Consumer Protection Review into protecting consumers when using regulated law firms. It was launched after the Axiom Ince law firm scandal of 2023, in which £60m of client funds were misappropriated.
For this blog, I spoke with finance leads at two large UK law firms to gather their views on client money-handling practices, the use of third-party managed accounts and the measures that need to be in place to safeguard client funds.
Client money handling
The requirement to handle client money varies across the legal sector, depending on the areas of practice and the size of the law firm. For instance, firms undertaking transactional work, such as conveyancing or M&A, often hold and disburse client funds as part of the transaction process.
Firms active in these segments can process hundreds of thousands of client transactions per year worth billions of pounds. For these providers, the facility to handle client money is considered intrinsic to their customer service proposition in terms of completing transactions in a timely manner.
“Firms have to work in the best interests of their clients and provide the best service possible. To deliver that service, they may need to hold client funds and have those funds readily available to move the money and complete a transaction.” Paul Rook, Finance Transformation Lead, Lewis Silkin.
Third-party managed accounts
With client money handling so closely tied to service delivery, firms that routinely handle client funds are often reluctant to use a third-party managed account provider, which is one proposal put forward by the SRA.
The use of third parties or escrow providers is not unheard of in the legal space. Magic Circle law firms handling large-scale M&A transactions often use escrow services because of the risks of handling vast sums, where a single transaction can run into the billions. Third-party solutions can also prove an attractive option for firms that only occasionally handle client money or small practices with limited resources, as it reduces the compliance burden of following the SRA’s client account rules.
Yet firms that fall between the two ends of the scale and regularly handle client funds highlight that using third parties would require a significant overhaul of current operating models. At the same time, their ability to differentiate based on service could suffer. There are also concerns about how quickly issues with client funds could be resolved if a third party enters the equation, as well as the potential for delays when completing transactions.
“Our Finance team offer a service which is highly valued by our Partners and, in turn, our clients. This is thanks to years of experience in managing high volumes of what are often high-value transactions. If that is taken out of the firm’s control and put through a third party, it would be detrimental to the service we provide to clients, who would ultimately continue to hold the firm accountable for the transactions.” Senior Finance Manager, UK Top 50 law firm.
Reform of client money rules
Rather than removing the ability of firms to hold client money, one alternative is for the SRA to reform current client money rules by introducing a certification process that firms must meet to hold client money.
“There is a lot that must be learnt from the Axiom Ince collapse. A good starting point would be for the SRA to state that firms cannot hold client money unless certified. To become certified, firms would need to demonstrate they have people with the right experience and knowledge, as well as segregated, robust processes. The SRA should also introduce stricter rules which are proportional based on the volume and value of transactions the firm processes. One set of rules cannot apply to all.
If you put this together, you reduce the risk to client money without impacting client service and costs. Certified firms would be required to file an annual accounting report (AR1) based on the enhanced rules. It makes no sense that, under the current regulations, a firm is only required to submit a report which is qualified, or has been mandated by the SRA. How does the SRA know whether a firm has been audited at all?” Senior Finance Manager, UK Top 50 law firm.
Law Society president Nick Emmerson has also emphasised the distinctive role that solicitors play in handling client money, marking a clear line between regulated legal professionals and their unregulated counterparts.
As Emmerson states, “‘The ability to handle client money is an important difference between solicitors as regulated professionals and unregulated services providers. Client accounts are a fundamental tool for the efficient and effective delivery of many types of legal services.” While he acknowledges that “most firms comply with all the rules,” he notes that “there are an exceptional few who abuse their position,” leading to his recommendation that “careful consideration should be given to applying appropriate and proportionate safeguards that might reduce risks to consumers.”
People, processes and technology
Ultimately, reducing risk is not about taking a tick-box approach to compliance but is best practised as part of a wider control culture with a focus on fraud prevention. It is essential to have appropriately qualified and trained staff to establish and maintain this ethos. From a process perspective, robust, multi-stage sign-off procedures to set up new client payees and authorise client withdrawals must be put in place. There should also be a clear segregation of duties in setting up new payees and making payments to those accounts.
“In my previous role, we did hundreds of thousands of client transactions each year. There was never an issue because we had robust controls and processes, with a clear segregation of duties. We also had the right culture in recognising the importance of client monies within the organisation.” Paul Rook, Finance Transformation Lead, Lewis Silkin.
Technology also has an important role to play. Traditionally, the legal sector has been slow to adopt technology, and it is not uncommon to find firms that collect paper instructions from clients and manually key them into bank portals to make payments, heightening the risk of fraud and error.
Increasingly, firms are using practice management solutions, which help to establish and cement approved workflows for billing and client transactions. Bank integration technology such as AccessPay can further derisk client money handling by connecting the dots between client account ledgers and bank accounts. This reduces the risk of fraud by removing the opportunity to manipulate data and restricting banking activity to approved individuals.
“As part of our AccessPay implementation, we are locking down what users can do in the banking platform. We will then be in a position where the only payments that can debit the client bank account are those which have completed the segregated authorisation process controlled within our practice management system. Perhaps automated payment processes such as this should become a minimum requirement for any firm wishing to hold client money.” Senior Finance Manager, UK Top 50 law firm.
Integrated account name verification (ANV) technology adds a further layer of protection by enabling finance teams to verify payee details before making payments. Activity is also logged, providing a ready-made, timestamped audit trail for reporting purposes.
Taking a proactive approach
The question of whether law firms should hold client money or rely on third-party managed accounts is a nuanced issue. While third-party solutions offer advantages for smaller practices or those that only occasionally handle client funds, there are drawbacks for firms where managing client funds is integral to service delivery. A middle-ground approach, such as certification for firms holding client money, could help mitigate risks without undermining client service.
Ultimately, the success of any model will depend on a firm’s commitment to cultivating a strong control culture underpinned by qualified staff and robust processes. Technology, including PMS solutions and bank integration software, also has a part to play in embedding processes and eliminating manual practices.
The SRA’s consultation marks an ideal opportunity to review current fraud prevention practices and consider how modern technology and updated workflows can be combined to further derisk client money handling.
