One of the most common compliance problems to arise in relation to the SRA Accounts Rules is the prohibition against providing banking facilities for clients. This rule, which will now be found at rule 3(3) in the Accounts Rules in the Standards and Regulations, has grown steadily in importance so far as the SRA are concerned in recent years. Its equivalent appeared as a guidance note only in the 2011 SRA Handbook along with the warning that it was “not a proper part of a solicitor’s everyday business or practice to operate a banking facility for third parties, whether they are clients of the firm or not”, and was stated at the time to follow a number of decisions in this regard at the SDT.1
The stricter view that has since been taken by the SRA is in no small part because law firms are not permitted by statute to provide banking facilities and so could be committing an offence if doing so. The impact of the then new rules were brought to the profession’s attention a few years ago with the report of the SDT judgment in the case of SRA v Kaufman, Kelman and Turner in 2016. In this case the firm had paid out just over £4m in pursuance of the instructions received from a wealthy entrepreneurial client to various of his creditors on the completion of matters rather than relaying the funds to him so that he could make the payments himself. In so doing they were held to be in breach and were subject to total fines in excess of £40,000. To their credit the breaches, it was found, had not been planned but followed an “uncritical following of the client’s instructions”.
Another more serious example of how the rule could lead to disciplinary proceedings was provided at the time by Fuglers LLP v SRA 2014. The firm were acting for Portsmouth FC who were, at the time, in serious financial difficulties and in risk of liquidation. To assist the club the firm received a substantial sum of money into their client account and then used the funds to meet various of the club’s operating costs, including various matchday expenses. Not surprisingly, this was regarded as a much more serious breach of the rule which resulted in fines of £75,000, with the opinion having been expressed that this amounted to serious misconduct which could have impacted upon the reputation of the profession as a whole. The firm’s subsequent appeal as to the severity of the sentence, furthermore, was dismissed.
The current version of this rule will be found at 3(3) of the SRA Accounts Rules 2019 which provides very simply 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.”
Quite what this rather simply stated prohibition will mean in practice in more marginal and less obvious cases continues to cause confusion, and has now been further explained by an SRA Guidance Note of the 1st March, which updates an earlier version from 2014. The critical issue, of course, is just how much discretion the firm will have in relation to the range of dealings and transactions that it will undertake for clients. On this point the note explains that regulated services should be understood to be “the legal and other professional services that you provide that are regulated by the SRA and includes, where appropriate, acting as a trustee or as the holder of a specified office or appointment”.
So far, so good, but many more particular examples will arise where the general drafting of the rule will not assist. The SRA has therefore set out to provide more detailed guidance on some of the more marginal situations that might arise. It is stressed that at all times there has to be a “proper connection between the delivery by you of regulated services and the payments you are asked to make or receive”, with the payment by conveyancers of estate agents’ fees quoted as one of the more obvious examples of a payment to a third party that will be permissible. On the other hand, the traditional practice of private client advisers having access to clients’ funds to manage payments for them as trusted representatives when the client might be overseas or indisposed will now be more likely to be regarded as a breach. This is based on grounds that the advent of internet and telephone banking have made it possible for the clients to undertake such transactions for themselves wherever they may be. It is nonetheless recognised that certain risk factors in such situations might make this permissible, such as where payments of large sums might be involved or where payments to family members or business concerns might make it more justifiable for the solicitor to be involved in this way.
Other than this there are warnings as to clients depositing funds into client account to shield them from possible insolvency proceedings or perhaps in order to launder funds as well. There is also a series of linked case examples which might prove helpful for those dealing with ongoing building development agreements, who act as trustees or are required to handle commercial rent deposits amongst them. There is also help for family practitioners where the proceeds of the sale of the matrimonial home are received by the firm but the parties remain in dispute as to how these should be paid out or divided. In this example no breach of the rule should be incurred until the parties can come to an agreement or a court ruling is obtained, and in the meantime it is suggested that certain payments to others, such as for school fees, should also be permissible.
The revised guidance will be helpful, but unfortunately the precise boundaries as to what may be permitted in more marginal situations will remain unclear. The advice in this regard must therefore be to proceed with caution.
For further information see:
- Improper use of client account as a banking facility – Warning Notice
- Improper use of client account as a banking facility – Case Studies
1 See SRA Accounts Rules 2011 rule 14 (use of a client account) guidance note (v).