Last week’s Legal Futures contained an article from the SRA’s Paul Philip on how and why a manager of a law firm must replace missing client money from their own resources, including taking a loan if needs be. He referenced the Fraud Act and case law. Put in the context of the Axiom Ince scandal and the general view that the SRA were asleep at the regulatory wheel with this firm, I can imagine the sector’s reaction to this.

Insurers pay multiple millions in client money losses each year due to fraud, errors and negligent mishandling. A relatively small number of errant firms and individuals are creating the issue for the majority of well run and disciplined practices.

The reason is because the SRA continue to demand “a carve out” in their minimum terms PII wording, to mirror the solicitors obligations – that is, that the Insurer must pay a claim for lost or missing client monies on demand, irrespective of circumstances, and in most cases, without the right of recovery.

This acts as a maintenance contract for badly run firms, some of whom know that they can use it as a fall-back position. More importantly, it is a public safety net, to avoid damaged reputation to the profession. This misses the point however, that without it, the many failures and client shortfalls would probably result in frequent tabloid coverage, and the SRA itself being called to account in the national press for failure to regulate the profession.

The scope of the current safety net is even greater than it appears, because the Insurers ability to aggregate a large number of losses from a common cause as a single claim – to limit its payout, does not apply to client money, because it is co-mingled and therefore Insurers have to pay multiple claims to each affected client. These are known as sideways losses, because they result in the potential for a number of total limit loss claims (IE £2m for a partnership and £3m for a limited liability practice) on behalf of the affected firm.

The regulator seems unable to resource to sufficient levels to focus in on, and root out the bad behaviours within the profession. Losses as a result of interception, where a firm is hacked, are growing, as are cyber incidents generally. It is also expected that with periods of economic downturn and uncertainty, errant practitioners will find a way to abscond with funds, so the problem may well get worse – unless the regulator forces through the removal of client money altogether.

It is interesting to watch all of this play out because most experienced leaders will know that to regulate or manage, you cannot ignore and fly in the face of your membership completely, and occasionally it is common sense and good practice to exhibit a little humility and say you’ve got it wrong and will try harder next time. Credibility is also crucial. And it helps to come out and state directly why you want to pursue a course of action such as the removal of client account responsibility from law firms, instead of using other publicity as a proxy. Without all of these things, the process of regulation becomes much harder.

Few would argue that being a regulator carries with it unpopularity, it is a difficult job, and a necessity to ensure that standards are maintained and the bad guys don’t get away with things. In terms of the timing, context and mood of their messaging though, it might be that some PR help to position those messages would be beneficial, so that the process of attrition between law firms, their people, and the regulator, does not get any worse.