By Liz Bond
Rule 3.3 of the SRA Accounts Rules, which prohibits the use of a client account as a banking facility, often causes considerable stress and raises a number of questions. This is why it frequently surfaces during SRA investigations and is flagged as a potential indicator of money laundering.
In answering the question of “is it or isn’t it”, the “does it feel right” test is often the best indicator.
In my years working in the Forensic Investigation Team at the SRA, it was generally very easy to spot where there was genuine confusion over the Rule and a desire to comply, compared to a desperate need to make it fit.
If justifying a payment feels like a complex, sleepless ordeal, it’s an indicator that there is a banking facility risk.
This post will dissect Rule 3.3, examining its meaning, and offer strategies for navigating challenging scenarios related to this rule.
Understanding Rule 3.3
The core of Rule 3.3 is that a client account must not be used to provide banking facilities to clients or third parties and payments, transfers and withdrawals must be in respect of the delivery of “regulated services”.
The SRA defines regulated services as “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“. Essentially, this refers to the typical work a solicitor performs.
A frequent misconception is assuming that an underlying legal transaction or a retainer with a client, automatically justifies monies into or out of the client account, or transfers between client ledgers. This is incorrect. Even with an underlying legal transaction, it must be for a regulated service, and there must be a proper connection between the funds and the underlying legal transaction. This rule and definition also apply when receiving funds from a third party.
Payments into client Account
The crucial question is “Why are we being asked to receive these funds and for what purpose?”. If you find yourself struggling to justify the answer, it’s likely there’s no proper connection, and you might simply be trying to appease the client. The argument, “I was following the client’s instructions“, is unlikely to be accepted by the SRA.
An example of such a situation would be using a client account to handle money for a client to get around insolvency laws. Banks often stop services when they hear about a winding-up petition. If a client account were used in an insolvency situation to receive and process funds, the client would be getting a banking service they shouldn’t have access to. Plus, there’s a chance that making payments to order could unfairly benefit one creditor over another.
Similarly, accepting client funds for a transaction without advising on it, or understanding it, solely to lend credibility to an investment scheme and reassure investors with a law firm’s involvement, risks breaching rule 3.3.
Transfers from client account
The rule also extends to transfers from a client account. Inter-client transfers without a clear connection or reason, warrant investigation as they could signal a breach of Rule 3.3 and other accounts discrepancies.
Be cautious of the client who requests that you retain monies following completion of the matter “just in case” they instruct you again. A transfer to a new matter would make sense if the new instruction was immediate, but otherwise, it would be likely to be a breach of rule 3.3. The SRA would scrutinize a continuous client “float” where no ongoing legal work is necessary, and repeated inter-client transfers to other matters would ring alarm bells.
Holding funds in a client account merely for client convenience is not a legitimate reason.
Of course, this also extends to transfers between clients. A request for a transfer from the proceeds of sale to another client matter where the firm is also acting, for example a family member wishing to gift a house deposit, should not be transferred to that matter. It should be returned to the client who can transfer it directly. Also be cautious of inter client transfers where you are acting for a client and also for a company in their name. The provisions of rule 3.3 still apply in such circumstances.
And keep in mind that retaining client money after a matter has concluded could also be a breach Rule 2.5 (not returning money to the client promptly) and result in residual client balances.
Withdrawals from client account
Breaches most commonly occur with withdrawals. Always ask: “Why are we being asked to make this payment, and why can’t the client make it themselves?” Again, if justification is difficult, the payment should probably not be made.
Even when authorised by the client, be mindful of what you are being asked to do. Paying off a client’s credit card bill from damages received into client account as per the client’s instructions would be likely to breach 3.3, in the absence of a proper connection to the underlying legal translation.
Principles
In addition to breaches of the Accounts Rules, using the client account as a banking facility can also result in breaches of Principle 1 (which is all about upholding the rule of law and making sure justice is properly administered), Principle 2 (keeping the public’s trust in solicitors and legal services), Principle 3 (acting independently), and Principle 5 (always acting with integrity).
Real case study
Firm A was acting for a client in a high value property sale. The client was met in person, their ID verified, and no issues identified regarding mental capacity.
During the onboarding process, the client completed the sale questionnaire form confirming the bank details and account to which the sale proceeds should be sent.
So far so good.
However, things got interesting when a week prior to completion, the client requested that the proceeds of sale be forwarded to a currency exchange platform where a specific account in the name of the client had been opened.
The SRA in its related Warning Notice (“Improper use of a client account as a banking facility“) refers to scenarios where the firm should ask itself why the money cannot be transferred to the client’s bank account, and then the transfer made by the client to their account. In such a case the SRA would expect the firm to be able to explain fully why the payments were being made and consider the risks involved.
In this case, the reasons cited by the client for the use of an intermediary platform were:
- They had recently relocated to the USA
- Their bank had a cap on daily transfers
- The currency conversion costs were significantly lower than the bank’s
- The client would need to return to the UK to authorise the transfers.
What were the risks?
The main risks centred on how the facility and the payments were structured. If the “facility” were in fact an investment account held in the name of the currency-exchange platform, with funds retained for investment rather than immediately remitted to the client, that would obviously point towards a banking facility risk. In this matter, the firm obtained evidence that this was not the case, which materially reduces that particular risk.
Separate from the account structure, transferring funds to the currency-exchange platform exposes the client to counterparty failure: if the platform were to fold, there would be no statutory protection and the client could lose the entire sum.
Against that backdrop sit two professional risks: first, a risk of not acting in the client’s best interests if the route chosen increases exposure without clear justification and informed consent; second, a risk of failing to return client money promptly to the client if the firm refuses to follow the client’s instructions.
What action could be taken to mitigate the risks?
- Obtain evidence that an account in the client’s name has been opened with the currency-exchange platform.
- Verify the instructions: confirm they genuinely originate from the client, that the client has in fact relocated, and that they are not acting under duress.
- Confirm whether the currency-exchange platform is FCA-authorised (and the nature of that authorisation).
- Speak directly to the platform and obtain written confirmation that funds will be forwarded straight to the client (not held for investment).
- Consider liaising with your insurer before transferring any funds.
- Consider seeking guidance from the SRA Professional Ethics Team.
- Compare the total cost and timing of using the client’s bank versus the currency-exchange platform.
- Complete a written risk assessment setting out the decision, the rationale and the evidence relied on.
Following a thorough risk assessment, the firm concluded it would not be providing a banking facility under Rule 3.3, on the basis that the currency-exchange platform would pass funds directly to the client.
The client was advised of the risk that the platform could fail, and asked to confirm when the funds arrived in their US account.
The SRA’s approach
The SRA takes breaches of rule 3.3 very seriously. Its Warning Notice provides details of the rule and why it is of concern. Warning notices are regularly referred to in regulatory investigations and there is a strong expectation that firms are familiar with them. The number of disciplinary proceedings concerning the improper use of client accounts are growing and recent outcomes include:
- A fine of £12,000 for allowing the client account to be used as a banking facility where the conduct extended over a long period of time, over a large number of transactions, and involved significant sums of money.
- A fine of nearly £50,000 plus costs of £18,000, for allowing the client account to be used by two wealthy clients as a banking facility. The firm stated it was “nervous” that it would otherwise lose the client.
- A fine of £5001 and total costs of £65,000 where the SDT stated, the firm allowed the use of a client account “for no other reason than the convenience of the client”.
- A fine of £25,000 and costs of £20,000 for allowing the client account to be used as a banking facility and failing to make adequate identity checks.
Case law
Fuglers LLP v SRA (2014)
One of the leading cases on this topic arose out of the insolvency of Portsmouth City Football club. During the football club’s financial troubles, its banking arrangements had been withdrawn. The SRA alleged that the Respondent law firm had allowed the client account to be used as the club’s banking facility. The implication was that there was an intention to favour certain creditors over others during the insolvency process.
The regulator relied on the 1998 Solicitors Accounts Rules, in which a note to Rule 15 read:
“…it is 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…”
Along with the 2007 Solicitors Code of Conduct, which stated:
“The business of a recognised body may consist only of the provision of…professional services of the sort provided by individuals practising as solicitors…’
On appeal, the Court agreed with the Tribunal that members of the public would take a “dim view” of a regulated firm using its client account to deprive creditors, and this would damage trust and confidence in the profession.
The firm and two of its partners were fined £75,000 between them.
Patel v SRA (2012)
In Premji Naram Patel v SRA [2012] EWHC 3373 (Admin) the High Court upheld a Solicitors Disciplinary Tribunal decision to fine a solicitor £7,500 for using his client account as a banking facility.
The solicitor had offered an escrow-type arrangement to effect the buying and selling of high value motor vehicles. There was no ‘underlying legal transaction’ or legal service directly linked to the movements of money through the account.
Wood & Burdett (2004)
In this SDT decision, the solicitors were found to have provided a banking facility for clients who wished to cash cheques through the firm’s client account, resulting in a strike-off.
It was stated that:
“it is 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…[Sooner or later] the solicitor concerned might well find himself laundering money without being aware that he and his banking arrangements were being utilised for such nefarious purposes.”
SRA case studies
A Warning Notice is one thing, but it is always helpful to have concrete examples of compliant and non-compliant behaviour. Acknowledging this, the SRA has published practical case studies, which are “illustrative of some of the components in the cases that we see to explain our decision making and potential outcome”.
The examples cover very specific situations involving:
- Instructing foreign lawyers
- Holding unconnected money in a client account
- Development work and holding money
- Unconnected payments from client account
- Investment scheme and an ‘escrow’ arrangement
- 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 offer
- ‘Legal advice only’ retainers
- Sale of the matrimonial home as part of divorce proceedings
- Parent paying child’s legal fees
- Conveyancing and retentions
How to stay safe
As we have seen, this is an extremely hot topic for the SRA. Enforcement action can result in fines, suspensions and even strike-offs. Reputation damage should not be underestimated, particularly if the firm itself is found to have ineffective controls.
Everyone regulated by the SRA is potentially at risk of prosecution, but those in the immediate firing line are individual file handlers, the COFA, partners and the MLRO/MLCO.
Our suggestions for reducing the risk of breach are:
- Have a policy and develop your own risk tolerance – It would be sensible to do a risk assessment exercises. Identify where your weaknesses might be (based on the type of work you do, the client base, and the general approach to compliance of your team). Using that as a basis for formulating a policy will provide an element of protection, by demonstrating to regulators that formal controls are in place. It will also make it easier for your team to see what is expected of them, beyond just “read the SRA guidance”.
- Raise awareness – We are often taken aback at the lack of understanding of the banking facility rule. It is a real blind spot for a lot of practitioners. “But we’ve always done it this way” is not going to hold a great deal of weight if the regulator starts asking questions. Putting in place your policy is an opportunity to remind your team of their obligations. Formal training has its place here too. We would also include support staff in this training, since cashiers and secretaries are in a good position to spot potential issues.
- Onboarding – think about what money might be expected at the outset – Some firms require file handlers to articulate their thinking as part of the client or matter onboarding process. That way, any departure from initial expectations will be immediately apparent. Maybe you don’t want to make it that formal, but arguably there should be some mechanism to prompt that thought process (before the momentum of the transaction takes over).
- Talk to clients about your regulatory limitations – Clients cannot be expected to know what you can and can’t do with your bank accounts. Being clear with them about your professional obligations at the outset can avoid awkward situations later.
- Include “we are not a bank” in your terms of business – Not all clients will read it, but at least they are on notice.
- Return client money promptly – You should return client money “as soon as there is no longer any proper reason to hold those funds” (rule 2.5 SRA Accounts Rules) in any event. Ensuring that rule is followed is an effective way to reducing the risk of balances being used for unconnected payments.
- File review and supervision – Supervisors should specifically look at payments in and out of the client account. Is there evidence that they are sufficiently connected with the legal work at hand?
- Review those long standing clients and general retainers – Clients who provide repeat instructions can sometimes be a blind spot. Not only is there a pressure to keep them happy, and therefore a temptation to follow their payment instructions, but general files can make it difficult to identify the specific legal work to which payments relate.
- Inter-client ledger movements – Where there are transfers of money between clients, we suggest additional scrutiny – perhaps from the COFA. Can the movements be justified by documents? Are they linked to the identifiable legal service? Is there any reason why the clients could not make their own arrangements between themselves?
What other systems do you have in place?
