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How can law firms improve the protection of client money?
Under lock and key.
Read time: 6 mins Added date: 04/03/25
From supporting corporate affairs to assisting in the purchase of real estate, the day-to-day operations of a law firm involve the handling of client money. But with regulators scrutinising this practice, firms should make sure that their interaction with client money is smooth, efficient and well protected. Working closely with banking partners could hold the key – here’s everything you need to know.
Recent risk incidents in the sector involving the loss or misappropriation of client money prompted the Solicitors Regulation Authority (SRA) to initiate a consultation on the protection of client money. The consequences of this review may have an unprecedented impact on the way that firms financially operate. 75% of all firms in the UK have handled client money in the past year. Around 80 firms held more than £100 million worth of client money and, for some, that figure rises to more than £1 billion.
Under scrutiny
The SRA’s review concluded on 21 February 2025. It was launched with the aim of investigating how law firms can interact with client money in a way that enhances consumer protection and maintains public trust. Additionally, it aimed to make sure that regulation is both efficient and reflective of market changes. The result of this consultation could see law firms entirely ceasing to hold client money.
But despite the intent of this review, many industry stakeholders and even consumers themselves believe that the current process is highly advantageous. Industry voices have said that there are benefits to law firms handling money on behalf of their clients, ranging from an improved end-to-end client experience, reduced third party costs and smoother, faster transaction times.
Aside from the consequences of the consultation, the SRA’s review acts as a reminder that banks can offer expertise and practical tools to help law firms improve their payments infrastructure and handle client money with greater protection.
Control at the heart
Part of the solution lies in a clearer designation of client money, which can be made possible through Externally Addressable Virtual Accounts (EAVAs). Unlike traditional account structures, the virtual equivalent means that a single overarching account holds the money, but can be sectioned off to support efficient treasury operations. Each EAVA carries its own IBAN, sort code and account number, meaning that for clients, they look and feel like traditional accounts.
As a result, EAVAs can offer an opportunity for law firms to build tailored account structures designated to hold money on a client-by-client basis. Their self-serve functionality allows firms to open and close them as needed using Application Programming Interface (API) technology. EAVAs can also use API technology to improve and streamline payment processes. Lloyds’ API-powered Embedded Payments suite can automate account-to-account Faster Payments for an enhanced client experience.
“Externally Addressable Virtual Accounts offer new avenues for clarity, control and efficiency,” said Jessica Armstrong, Head of Professional Services, Lloyds. “Firms in the Professional Services sector could especially benefit from reviewing their account structures and implementing virtual accounts – making for an improved and secure client experience.”
Reconciliation like clockwork
Manual reconciliation can be a cumbersome process that requires time and resources while being prone to errors. These errors can represent a security risk for law firms handling client money. By contrast, law firms can work with their bank to enable automatic reconciliation by using host-to-host or API technology. This means that firms can benefit from a streamlined, easier reconciliation process.
Automatic reconciliation quickly matches client payments with their corresponding transactions, significantly reducing the likelihood of errors and discrepancies. This goes a long way to improve security and efficiency, while reducing the manual workload on employees and allowing them to focus on other tasks.
Migrating to an improved method of handling client money is both possible and simple when leveraging the banking technology at our disposal.
Jessica Armstrong Head of Professional Services, LloydsPlay it safe
API technology has broader applications in the legal sector beyond making payments and automating the reconciliation process. Security-focused API solutions – such as Lloyds’ Confirmation of Payee – help to reduce the risk of both fraud and the misappropriation of money. Confirmation of Payee verifies the beneficiary’s account details either at the beginning of, or throughout, the relationship. This heightens security and makes sure that the payment is made to the correct beneficiary.
“Migrating to an improved method of handling client money is both possible and simple when leveraging the banking technology at our disposal,” said Jessica. “By working closely with their banks, law firms can make sure that they can offer a watertight and secure experience for their clients.”
A mirror image
While it’s important for firms in the Professional Services sector to enhance the protection of their clients’ funds, it’s also important for them to have confidence in their bank. Firms need to have assurance that the institution holding their clients’ balances also have the correct segregation, product governance and risk management to ringfence the money.
Lloyds has significant experience in working with firms in the Professional Services sector, applying high levels of rigour to support firms that handle client money. Lloyds Corporate & Institutional is currently holding more than £2 billion worth of client money for the sector and employs strict practices to ensure a high level of protection.
The safe handling of client money is of intrinsic importance to the functioning and reputation of firms in the Professional Services sector. Lloyds’ extensive experience working with these businesses means that we have a wide array of tools and practices to help firms in the sector run efficiently, securely and without delay.
Mansour Davarian Co-Head of Transaction Banking Solutions, Lloyds Corporate & InstitutionalAuthored by:
- Jessica Armstrong, Head of Professional Services, Lloyds Corporate & Institutional
- Mansour Davarian, Co-Head of Transaction Banking Solutions, Lloyds Corporate & Institutional.
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