SRA Proposed Change to The Definition of What is Client Money. Who Benefits?

In short the Solicitors Regulation Authority (SRA) and administrators of firms in administration will benefit.

The SRA recently launched a consultation on changes to the Solicitors Accounts Rules. Of particular significance to medico-legal organisations and solicitors is the proposed way that professional disbursements will be dealt with.

The SRA has proposed that “Payments for professional services for which the firm is liable should in our view be treated as any other liability of the firm.” The SRA goes on to say that “We accept that the proposal removes some protections for those other than the clients (forexample Counsel and other experts). We consider that these risks in relation to Payments for which the solicitor is liable are adequately addressed through clear duties to act in the client’s best interests.”

‍So what might the potential impact on medico-legal companies be?

1. Medical report fees will become the responsibility of the firm and not the client. This will prevent medico-legal companies from recovering their fees ultimately from the client who had the benefit of the services provided or from the Solicitors Compensation Fund where the solicitors practice has misappropriated the money.

2. In an intervention scenario the outstanding medico- legal fees will become part of the administration and when recovered will go into the general administration pot. Medico-legal companies will only get paid a tiny percentage of the fees with preferential creditors such as the SRA and the administrator using the fees recovered to get paid first!

3. Lenders will be less inclined to support medico- legal businesses as the risk of failure of a medico-legal company will be greatly increased. This will ultimately massively impact the availability to the consumer of deferred payment for medical fees, the commercial write off arrangements and introduce stringent risk control by medico-legal companies.

The Solicitors Disciplinary Tribunal in 2015 heard 140 applications, of which 58% involved allegations of Solicitors’ Accounts Rules Breaches, Client Money:- Improper utilisation, Misappropriation; Failures:- Failure to pay counsel’s/agent’s fees (Source Solicitors Disciplinary Tribunal Annual Report).

So what might the potential impact on Solicitors Practices be?

1. Cash flow:- Suppliers are unlikely to offer the same credit facilities to defer payment on the cases resulting in law firms having to pick up the costs and carry the burden themselves.

2. Accounts:- Solicitors accounts will need to show their liability for disbursements within their annual accounts affecting the balance sheet and subsequently their ability to obtain funding from their banks.

3. Credit Risk Assessment:- Many firms will be unable to gain access to credit or will find their credit facility capped by suppliers to ensure they are not unduly exposed by an individual firm closing. In 2015 745 law firms closed representing 7.2% of all solicitors firms in England and Wales. (Source SRA Website).

4. Increased administration:- Suppliers will engage in more credit control to ensure fees that are due are paid increasing the administration costs on the law firms in dealing with the queries.

5. Consumer Credit Agreements:- Suppliers may insist on the client signing a credit agreement before providing services. Given that none of the issues above has been identified in the SRA’s impact assessment the SRA needs to re- examine its proposal. The current definition of client money has been instrumental in building easy access to funding for clients without interest charges being applied. It has enabled ‘access to justice’ for many thousands of consumers through readily available deferred payment schemes operated by medical reporting organisations, experts and barristers. It has provided the necessary protection and certainty for suppliers to enable them to provide external investment into law firms, alleviating cash flow problems that law firms would have otherwise incurred.

I can see no justified reason to change the definition and strongly urge all stakeholders to make their views known to the SRA by completing the consultation paper by the 21st September deadline, details of which can be found at: www.sra.org.uk/sra/consultations/accounts-rules-review page.

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