All solicitors know that compliance with the SRA Accounts Rules is central to keeping on the right side of regulation. Keeping client money safe is a fundamental part of being a trusted regulated professional.
Having the ability to hold client funds in a client account enables solicitors to facilitate transactions. But SRA-regulated law firms must never offer pure ‘banking facilities’ through their client account.
In this post, we look at what a ‘banking facility’ actually means, why the SRA cares and what to look out for.
Look out for our upcoming webinar on this topic (26 July 2023 at 12pm – register with Lexology here), and sign up to our COLP Insider newsletter for recording links and future webinar invitations.
What does the SRA mean when it refers to a client account ‘banking facility’?
Rule 3.3 of the SRA Accounts Rules is pretty clear:
“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.”
“Regulated services” is defined 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”. Or in other words, the type of work that a solicitor would typically perform.
The previous (2011) incarnation of the banking facility rule similarly said:
“You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”
The 2011 Guidance Note said that the rule “reflects decisions of the Solicitors Disciplinary Tribunal 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…It should also be borne in mind that there are criminal sanctions against assisting money launderers.”
However, the rules themselves do not define ‘banking facility’, which would suggest that every case is fact-dependent.
Despite this ambiguity, the regulator takes the rule very seriously. Our fortnightly COLP Insider newsletter often covers disciplinary matters concerning breaches of Rule 3.3.
Take, for example, the fine of £7,501 for using his client account to pay his overseas client’s utility bills and other expenses.
Or the fine of £10,000 for allowing bridging finance and other property loans between multiple parties to pass through the client account without any apparent underlying legal work.
And in a recent SRA decision, a sole principal was fined £8,000 for breaching the banking facility rule. This came about through the firm’s ‘blending’ of client and office money, and using the client account to pay business expenses and salaries.
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 Warning Notice – ‘Improper use of client account as a banking facility’
The SRA Warning Notice was first issued in 2014, and further updated in 2018 and 2023. It reflects the relevant case law and aims to provide firms with clearer guidance on the issues.
Being a Warning Notice, it carries with it the assumption that solicitors are on notice that breach of Rule 3.3 is a serious regulatory issue, and so carries significant weight in prosecutions.
The SRA’s concerns can be summarised as:
- Providing banking facilities through a client account is objectionable in itself. “If you do provide banking facilities for clients, you are trading on the trust and reputation from your status as a solicitor in doing so.” Put simply, solicitors are not regulated (or subject to the same level of scrutiny) as banks. Clients should not be able to side-step the banking system by piggy-backing off solicitors’ client accounts. Note that it is not enough to show that there is an underlying transaction, a phrase that causes some confusion. The firm must also (a) be providing a regulated service and (b) be satisfied that the money is sufficiently connected with that service. It is not an excuse that the client does not have their own bank account.
- There must be a proper connection between the delivery by you of regulated services and the payments you are asked to make or receive. “Whether there is such a proper connection will depend on the facts of each case. The fact that you have a retainer with a client is insufficient to allow you to process funds freely through [sic] client account.” This means that solicitors should not be paying expenses on behalf of clients, unless there is a proper link between those payments and an ongoing legal service. Client convenience is not a factor. The expectation is that clients should make those payments directly.
- Risk of insolvency. Under the Fuglers principle, solicitors should not enable clients to undermine the insolvency process, particularly where traditional banking facilities have been withdrawn.
- Rule 3.3 and the risk of money laundering. As illustrated by Wood & Burdett, solicitors providing a financial service for which they are not regulated heightens the risk that bad actors will target them as a weak link in the chain of money laundering controls. The Warning Notice also highlights situations where firms make “multiple transfers of money between the ledgers of different clients or companies without evidence of the purpose or legal basis for the transfers”, which will offend the banking facility rule.
Case studies added in March 2023
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 recently overhauled its 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 on of those dreaded 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 ‘CPD’ 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?
