SRA should be “bolder” with third-party managed accounts

Hayhoe: No convincing evidence to limit compensation fund

The Solicitors Regulation Authority (SRA) should be “bolder” in its approach to third party managed accounts (TPMAs), the chair of the Legal Services Consumer Panel has argued.

Tom Hayhoe also said it was “not acceptable” for the SRA to impose restrictions on its compensation fund “when the risk can be wholly or substantially removed by excluding lawyers from managing client money”.

Mr Hayhoe said the panel had “always supported” the use of TPMAs to process and manage payments and transactions.

“This idea has been explored by the SRA in previous years and we have responded positively to these consultations.

“We believe the time is right for the SRA to be bolder in its consideration of this idea, and at the very least make a transparent decision with a clear rationale for its position.”

Mr Hayhoe said otherwise the option to use TPMAs would only resurface “when there is a problem or crisis”.

On behalf of the panel, he responded to the SRA’s consumer protection discussion paper, launched in February, which set out a number of options, including limiting or ending the management of client funds and the compensation fund by lawyers.

Mr Hayhoe said the panel “agrees with all the arguments for TPMA” and is “convinced that TPMAs will eliminate or dramatically reduce theft”.

However, he said that in order to work in the interests of consumers, “certain principles” must be observed.

This included the independence of the third party from the transaction party and transparency about the status and ownership of the third party. This should be regulated by the Payment Services Regulator, which falls under the umbrella of the Financial Conduct Authority.

TPMAs “do not have to be a one-size-fits-all approach for all types of firms or authorised persons” and there could be some form of risk assessment that indicates which firms or practitioners “should be excluded from holding client money”.

Mr Hayhoe said the panel should “focus heavily on the first part of its review around the effectiveness of its current processes and policies”; until it could “clearly demonstrate” that preventative measures such as TPMAs minimised or eliminated the risks of theft, it was “unacceptable” for the SRA to reduce the scope of the compensation fund.

The SRA has “not yet provided convincing evidence” to limit the fund’s scope.

He continued: “It is not acceptable for the SRA to change the compensation fund scheme to the detriment of consumers when the risk could be completely or substantially removed by excluding lawyers from managing client money.”

On oversight and audit, Mr Hayhoe said “multiple scandals” had highlighted shortcomings in the SRA’s supervisory and audit activities and the panel had stressed that “there must be elements of external oversight and benchmarking with other regulators (outside legal services)” to conduct a comprehensive investigation.

“This is the minimum the panel would expect from a regulator serious about addressing what are now clearly systemic failings.”

Mr Hayhoe added that the discussion paper suffered from the “recurring problem” of “inadequate information” provided by the SRA.

“There is little detail on the authorisation, monitoring and oversight processes. There is also no information on the finer details of the compensation fund.”

The panel had expected “less information” from a discussion paper, but “even for a discussion paper, the data and evidence provided do not provide the panel with sufficient insight for meaningful engagement.”