Banking facilities – improper use of a client account
Banking facilities and the improper use of a client account remains a hot topic for the Solicitors Regulation Authority (SRA) following the increased flexibility given to firms as part of the move to the 2019 accounts rules.
Firms have been able to adapt their systems and procedures based on what works best for them, within the wider scope of the new rules. However, since their implementation the SRA have highlighted a number of key risk areas, providing warning notices and more detailed guidance notes to ensure compliance in these important areas.
One such issue is that surrounding the improper use of a client account. Rule 3.3 of the SRA accounts rules states that:
‘You must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawals from a client account must be in respect of the delivery by you of regulated services’.
The SRA have used a number of case studies, to illustrate the most common examples of scenarios where firms may be at risk of breaching this rule, these include:
- Instructing foreign lawyers
- Holding unconnected money in a client account
- Development work and holding money
- Unconnected payments from a client account
- Investments schemes and ‘escrow’ arrangements
- Trust administration work
- Commercial rent deposits
- Lasting powers of attorney
- Lack of availability of UK banking facilities
- Aggregated funds
- Collation of investment funds
- Lender’s condition on mortgage offers
- ‘Legal advice only’ retainers
- Sale of the matrimonial home as part of divorce proceedings
- Parent paying child’s legal fees
- Conveyancing and retentions
A couple of common scenarios encountered are clients of solicitor practices asking firms to make third party payments for their own convenience, or to hold onto funds at the end of a matter for potential future work, again for the client’s convenience. The key issue here is that firms must be mindful of is whether there is a proper connection between the flow of funds (this includes receipts, payments and holding monies) and delivery of an ongoing regulated service by the solicitor practice to that client. The SRA explicitly state that the client’s convenience is not a legitimate reason for receiving or paying funds to a party other than directly to the engaged client.
It is therefore crucial that firms ask themselves why they are being asked to receive money, make payments, transfer funds between matters, or continue to hold funds. Firms must consider this within the context of the regulated service they are continuing to provide. The potential risks here are great, as using the client account as a banking facility can lead to unintended consequences such as aiding the avoidance of insolvency obligations or facilitating money laundering. There are a number of disciplinary tribunal outcomes which highlight the importance of a good awareness of, and compliance with, rule 3.3.
In light of the SRAs continued focus on this area, we would urge all solicitor practices to ensure they familiarise themselves with the case study guidance referenced above, provided by the SRA. These case studies are continuing to be updated by the SRA for further clarity and to reflect areas of perceived increased or additional risk. We would also advise firms to ensure their accounts office manuals are fully up to date and that any risk areas are documented, to show that firms have considered any potential risks, are evidencing strong compliance with the rules and are protecting client money.
If you need further guidance on this topic, contact us here.
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