England and Wales: Law firms improve systems for handling of client money

The number of qualified accountant’s reports to the Solicitors Regulation Authority (SRA) over breaches in handling client money fell by 28 per cent to 1,387, from 1,915 in 2016.

Chartered Accountants and business advisers Hazelwoods, who specialise in the legal profession, said the fall suggests law firms are improving their systems and controls for managing client money.

The primary drivers of the breaches reported last year include law firms maintaining residual client balances, where they do not return leftover client money once all work has stopped; and firms acting as a bank for clients, including receiving and holding money, and making payments on their behalf, outside of the originally agreed instructions.

Very little action usually results from qualified reports as they often pick up on technical breaches without detriment to clients. However, some material breaches do result in substantial fines.

Andy Harris, associate partner in Hazlewoods’ legal team, said: “This sharp decline in overall problems is very positive news for the legal sector. Reports of breaches are falling as finance teams at law firms settle into the new regime, and as law firms take those reports that are submitted more seriously.

“With fewer breaches being reported by accountants, who were previously often reporting on fairly trivial points, law firms are now better able to see where any issues really lie and pro-actively put them right.

“Many of these issues may only be technical breaches, but it’s still important that they are identified quickly and addressed. The SRA also has more time to focus on reviewing the most important cases. That can only be a good thing.

“Solicitors want to help their clients by doing as much as they can for them. However, if they act outside of their original remit, for instance by making payments on a client’s behalf - even if requested by them to do so - this can actually constitute a breach of the SRA’s rules.

“It’s encouraging that the SRA now has more time to follow up with firms to ensure that where a potential problem is flagged up, the issues are rectified.”