The SRA recently published a warning notice which flagged improper use of a client account as a banking facility as an ongoing concern within the Accounts Rules. The notice, published in March 2023, includes guidance to help law firms understand their obligations and how to comply with them.
Who do the SRA Accounts Rules apply to?
The SRA Accounts Rules are relevant, and apply to all law firms, their managers, and their employees, who have any involvement in holding or using money received by clients or other third parties. In this case, reference to ‘managers’ includes sole practitioners, partners in a partnership, members of an LLP or directors of a limited company, and ultimately, they are jointly responsible for compliance with the Rules. Whilst the day-to-day activity usually sits with the legal cashiers, finance teams and solicitors, it’s worth the reminder of where the ultimate responsibility lies.
The SRA have been warning law firms for a number of years that they must not provide banking facilities to clients or others, with the latest warning notice acting as a reminder of the key issues and risks associated with improper use of a client account as a banking facility.
The advice has now been widened and includes additional specific case studies. These include the sale of a matrimonial home in divorce proceedings, conveyancing and retentions and commercial rent deposits. In our experience, we see the latter two as common across our law firm clients.
Where do the SRA Accounts Rules refer to improper use of a client account as a banking facility?
Rule 3.3 of the SRA Accounts Rules states:
“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.”
In this case, ‘regulated services’ refer to the legal and other professional services provided by a law firm which are regulated by the SRA, including instances where the firm may act as a trustee or as the holder of a specified office or appointment.
According to the SRA, “a breach of rule 3.3 is a serious matter in itself” and allowing your firm’s client account to be used improperly may result in breach of SRA Principles by failing to act.
What are the key issues?
Rule 3.3 reflects the decision of the Solicitors Disciplinary Tribunal which concluded that the operation of a banking facility for third parties is not a proper part of a solicitor’s everyday business or practice, regardless of whether the third party is a client or not.
Although law firms are not regulated as banks, professional obligations under anti-money laundering regulations still apply. If banking facilities are provided, trading is taking place on the trust and reputation from your status as a solicitor, and the negative impact could therefore be significant.
It may seem that rule 3.3 is trying to make everyday law firm transactions difficult to carry out, but put simply, it is attempting to set professional parameters for law firms to follow, thus reducing the risk of firms in the industry falling foul of third parties who may have other objectives when moving their funds around.
The question to ask before accepting monies, or making payments out of the client account, is whether the transaction is part of the service you are engaged to provide. If funds are not coming directly from the client who the engagement is with, then the source of those funds must also be identified. Managing a client’s expectations is key and should be done at the outset. Being clear with clients on how funds will be managed is critical to great client service and communication.
Be aware – failure to justify any decision made by the firm where you deem it appropriate to hold or move client money is likely to lead to disciplinary action, therefore, the advice in this regard is to proceed with caution.