The cost of borrowing may go up if law firms abandon client accounts

12 August, 2015

A joint report by the UK’s legal regulators has revealed that law firms may be charged more by banks to borrow money if they stop using client accounts.

The report submitted to justice minister Shailesh Vara by the Legal Services Board (LSB) on behalf of the legal profession’s other regulators, highlighted both the benefits and risks of abandoning the client accounts model.

It comes after the regulators held a deregulation summit last year, which explored the alternative options to holding client accounts. It highlighted a number of hard-hitting potential dangers to the alternatives, including an increase in borrowing cost.

“It has been suggested to us that banks may currently give favourable borrowing rates to law firms based in part on the amount of money those firms hold in client account, on the basis that banks make other income from such firms in terms of telegraphic transfer fees for transfers in and out of client account (for example for conveyancing transactions),” it said.

“Therefore, there could be a risk of ‘loan re-pricing’ for such firms if they opt to move away from handling client money.”

The report also found weaker security control at third party alternatives to client accounts, which could enable criminals to steal account details.

The regulators added: “During a conversation with a payment institution, an individual voiced concerns over unregulated sections of this industry and how he suspected that ‘millions of pounds of client money is being held in schemes that are being used for money laundering, and/or criminal or terrorist funding’.”

The regulators warned that they might not have “the same power to require actions by or information from any third party provider” and the “financial stability” of a provider would be not as visible as that of a law firm.

Looking at client protection, the report said that compensation schemes operated by third-party providers were not likely to be as generous as the regulators’ own compensation schemes.

“The use of a payment institution may make more commercial sense for some types of providers than others. The impact of one type of practitioner changing its preferred model on other parts of the market would need to be considered,” the report added.

“The legal services market may be unattractive to payment institutions, for example if only a small number of firms wished to use their services and they were required to comply with additional regulatory requirements.”

The report went on to add that the alternatives did offer advantages, such as less regulation and a smaller reporting requirement, which might appeal to some smaller firms worried about compliance and costs.

At Watson Buckle our team of legal finance experts have years of experience helping solicitors manage their client accounts, ensuring that the money held in trust meets the compliance requirements of the sectors regulators. If you would like help managing your client accounts or would like advice on switching to a third party provider, please contact us.