Increased risk of 'misuse of client money' by solicitors, SRA warns

The SRA has warned of an increased risk of "misuse of client money" by firms in financial difficulty, including theft of conveyancing and probate funds.

In a consultation paper on the cost of interventions, the regulator said the economic situation was "not improving and firms which were formed on poor foundations are in difficulty and are not being saved by new growth".

"With the coming pressures of legal aid changes, the implementation of the referral fee ban in personal injury cases and increased competition in the market, it seems likely that there will be a period of significant market correction perhaps over the next two or three years," the SRA said.

"Other tools such as education and communication are important to ensure so far as possible that firms understand their position and take necessary action to protect the interests of their clients and ensure that they are complying with their regulatory obligations.

"In the past, failing firms were able to merge or were acquired. Low levels of profitability in some areas of work are making acquisition of firms unattractive and therefore, existing firms are unable to continue to trade in the legal market."

The regulator said the failure of Cobbetts earlier this year, which could have cost 6m, did not result in intervention because it was bought by other firms. In the cases of Blakemores and Atteys, there were no buyers and so intervention was necessary.

The SRA said it had not previously experienced the interaction of the factors which led to the failures of Cobbetts, Blakemores and Atteys in firms "of any significant size", but "given our knowledge of the financial position of a number of substantial firms and current market conditions we now expect to see more".

The consultation paper recommended that the cost of interventions this year, above those already in the regulator's budget, and all intervention costs from 2014 should be met from the Compensation Fund. The consultation will close on 31 May.

The SRA added that it was carrying out a 'root and branch' review of solicitors' compensation arrangements, including considering "whether we need compensation arrangements at all".

Among the questions to be raised were whether clients should cover the cost of compensation by taking out their own fidelity insurance or indemnity insurance should be extended to cover "some or all" of the claims paid by the Compensation Fund.