Should the Law Society set up a Bank?

 In Comment, Gill's Blog

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As yet another Banking crisis appears over the horizon and trust in the sector is damaged once more I ask myself “should the Law Society create a Bank”?  What do you think?  Of course there are pros and cons and I am sure it is not easy as demonstrated by Dave Fishwick in the Channel 4 programme Bank On Dave, but I believe the time has come for the Law Society to do something creative, innovative and positive for its members.

What is a professional body for?

Representing the members of the solicitor’s profession and defending their position in the face of criticism and competition is necessary, but recently the Law Society (TLS) has issued Practice Notes saying why members should not follow our regulator’s guidance over the referral and use of Financial Advisers; heavily criticised BarCo proposals for the use of escrow accounts to enable Barristers direct access to consumers and strongly advised members not to accept the terms of the new Standard Agreement issued for instructing members of the Bar.

In other words, it is simply criticising other professions or our regulators, albeit possibly with justification, but it is not being itself innovative and creative on its member’s behalf.  It needs to take a quantum leap if it is to enable members of the solicitor’s profession not to just compete with traditional rivals but with new, more dynamic ABS outfits.

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Why a Bank?

It is interesting to note that in seeking to compete with solicitors for direct access to consumers of legal services, an entity needs to be able to have access to systems for handling money.  The Solicitor’s Client Account system has stood the profession in good stead for many years smoothing out the conveyancing process and providing opportunities to manage large sums of money easily, but it comes with increasing risks of fraud which are hard to police and costs all firms with client accounts dearly in Professional Indemnity Insurance premiums and the profession as a whole with the contributions to the Compensation Fund.

If we were starting again would the profession actually want to be responsible for handling money and if so, would it want some better returns and features for the privilege to aid clients?

The escrow system is used by lawyers in other jurisdictions to enable transactions and money management to take place without the same risk and compliance issues which come with the SARS e.g. Canada.  The Bar presumably had a look at other ideas and chose the lower risk model which the escrow system offers.

If this model has a proven track record, why suggest the much bigger task of escalating the solicitor’s profession to that of Banker?

Some of the new entrants to the legal services market such as the Co-operative Bank are part of businesses which offer financial services and banking as part of the mix. It is interesting that Virgin Money has gained a bank. If these commercial enterprises who are already or possibly planning to dominate the Wills, estate administration and probate arena have incorporated banking within their mix. Why?

The service which many law firm clients receive from retail banking is poor.  Loans to meet IHT charges in an estate are pretty much a thing of the past; the recognition of different powers of attorney and their use in managing a client’s money is generally poor to abysmal and there are increasingly cases of frustration in not being able to satisfy correct Money Laundering procedures. We have had, amongst other things, the mis-selling of protection insurance, the unwillingness of some banks to lend to customers and ridiculously low rates of interest on funds.

If the solicitor could tap into a new on-line only Law Bank which offered competitive terms to customers, understood the legal customer’s needs for some of the technical arrangements for private client banking, e.g. retaining records for 7 years and not 6 at best, which should aid compliance when dealing with potentially exempt transfers for IHT; and offered excellent customer service, a bit like the First Direct model, this would be innovative and distinctive.

At the same time, it would be possible to utilise the escrow arrangement with the Law Bank holding the funds to avoid the need for the regulatory compliance associated with SAR in respect of solicitors’ client accounts for those firms who would prefer not to have a client account.

Challenges

Access to Law Bank would need to be on-line but let’s make it open to all to use by offering limited access through some of the solicitor’s branch network. I appreciate that this may create problems of conflicts of interest as well as the prospects of defalcation, but it cannot be beyond the wit of intelligent banking lawyers to devise suitable protection.

Of course, it would be necessary to have the relevant expertise to create the new Law Bank and run it effectively, but if Virgin Money can purchase a Bank to gain a banking licence, then hopefully The Law Society should be able to meet any stipulated criteria even if, according to Patrick Collinson in the Guardian (6 July 2012), only one new bank has been approved in the last 100 years!

But if we only react to what everyone else is doing and don’t take a reasoned leap into a different way of doing business, lots more firms may find themselves in the same position as Cobbetts.

The ICAEW and the Bar step forward boldly to offer their members ways of strategically making inroads into the work of the solicitors’ profession while TLS spends time fighting fights which have the potential to make the solicitor’s position untenable.

Let’s have some creative thinking.  Let’s get innovative and maybe by doing something different, TLS can build on the ‘trusted adviser’ brand for the benefit of solicitors.

Gill Steel

7 February 2013

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