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19.05.21

Does the client account remain sacrosanct to the modern-day solicitor’s practice?

If it needed pointing out, the SDT gave a ruling in 2018 which confirmed that the “client account should be sacrosanct, and every solicitor should know that it is to be treated as sacrosanct”1. However, in light of the steady flow of SRA investigations and SDT proceedings that have arisen from the improper use of client accounts since 2018, we are left to question whether the client account is truly sacrosanct to the modern-day solicitor’s practice.

The client account

Clients don’t just expect their solicitor to provide suitable legal advice. They also expect their solicitor to safely handle their finances when the nature of their instructions requires client monies to pass through the client account. This trust in holding and accounting for client account monies is enshrined in the professional, equitable and fiduciary duties that solicitors owe to their clients.

It is also indisputable that a law firm’s client account must be secure, and monies should never be removed without authority. After all, it is not unusual for a client’s life savings to flow through a solicitor’s client account during the ordinary course of a conveyance, a civil dispute or through probate. The central importance of protecting client monies is also reflected in the Solicitors’ Minimum Terms, which requires all Professional Indemnity insurance policies to immediately respond when there has been a defalcation from the client account.

However, in light of the following scenarios, these principles do not appear to prevent a minority of the profession from abusing the client account for their own gain and/or prevent the client account from being targeted by third party fraudsters who regard it as a sitting target within the heart of every UK legal practice.

Solicitor dishonesty/recklessness

A glance through the Law Society Gazette over the last year reveals a steady number of reports of solicitors dishonestly and/or recklessly handling their client accounts. It is also common for a dishonest solicitor entrusted with access to client account monies to manipulate the client account ledger on a number of different files in an attempt to hide the misappropriation of monies in a term that is often referred to as “teeming and lading”‘. This can give rise to significant difficulties in accounting for client account monies when the dishonest activity is finally uncovered as well as complex insurance arguments on the aggregation of claims that result from the solicitor’s dishonest actions.2

Provision of banking facilities

And the problem is not just limited dishonesty or recklessness. The SRA has been concerned with solicitors allowing their client account to be used as a banking facility for the best part of twenty years3. The SRA’s August 2018 warning note4 confirmed that in the preceding 12 months, the SRA had prosecuted 20 solicitors and three firms in connection with the improper use of client accounts as banking facilities.

In November 2019, a further update was issued following the implementation of the new Solicitors Accounts Rules. The central focus is still to keep client money safe from misuse and prevent money laundering, but the prohibition on using client accounts as a banking facility is now set out in a slightly revised rule 3.3 which provides that 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.”

1 SDT v Christopher Mark Howdle [11730-2017] https://www.solicitorstribunal.org.uk/judgements-list 2 See Lord Bishop of Leeds & Others v Dixon Coles & Gill (A Firm) & Others [2020] EWHC 2809 (Ch) 3 Wood v Burdett (SDT 8869/2002)
4 https://www.sra.org.uk/sra/news/press/2018/client-banking-warning-notice/

This prohibition is (one would hope) well known, and it may seem obvious, but it is worth repeating.
changes in rule 3.3 now make it absolutely clear that client monies should only be handled for the purpose of the regulated service which is being provided by the firm and for which the monies are intended. There must therefore be a proper connection between the underlying transaction where legal advice is being provided and the payments made/received into the client account.

Solicitors who breach the prohibition in rule 3.3 carry the risk of SDT disciplinary action, and even the risk of being struck off. It is therefore essential that solicitors ensure strict accounting procedures are adhered to across the business and that all transactions can be justified.

Notwithstanding the SRA’s efforts to draw attention to the importance of proper accounting and the implications in the event of a breach, there continues to be a steady stream of decisions from the SDT and SRA on this point and it is clear that there remain some difficulties in adhering to this rule across the profession.

Cyber fraud

The current COVID-19 pandemic, and the vulnerabilities arising from law firms exclusively working from home, is also driving a new wave of cyber fraud on law firms throughout the UK. According to the SRA, in the first half of 2020, nearly £2.5m of money held by law firms had been stolen by cybercriminals – over three times the amount reported in the same period in 20195. Cyber fraud and its various forms (phishing, spear phishing, vishing, malware attacks and Friday afternoon frauds) are not new concepts to law firms but it seems that law firms and their client accounts have become increasingly attractive (and exposed) to fraudsters who are preying on law firm partners who may inadvertently let their guard down whilst working from home, home-schooling their children, looking after vulnerable family members and/or attempting to keep their law firms afloat in extremely challenging circumstances.

No client account

Perhaps the most significant indication that the client account is no longer sacrosanct to the modern-day solicitor’s practice is the fact that it is no longer necessary for solicitors to have a client account at all. Rule 2.3 of SAR 20196 enables solicitors to implement “an alternative arrangement in writing with the client or the third party for whom the money is held”, thereby allowing solicitors to bypass the need to have a client account in individual cases. In conjunction with this, rule 11.1 allows law firms to outsource the handling of client money to Third Party Managed Accounts (“TPMAs”).

The reported take up of TPMAs has been slow to date (with only 60 out of 10,500 law firms)7. However, it is relatively early days, and in light of the ongoing troubles highlighted above, it seems likely that an increasing number of firms will look to reduce risk, stress, anxiety and possibly PI premiums by outsourcing the function of the client account. And if that’s right, the solicitor’s client account could become a thing of the past, regardless of whether it is sacrosanct or not.

Guest writers from Womble Bond Dickinson

© Copyright 2021 Womble Bond Dickinson (UK) LLP. All rights reserved. This communication is provided for general information only and does not constitute legal, financial, or other professional advice so should not be relied on for any purposes. You should consult a suitably qualified lawyer or other relevant professional on a specific problem or matter.

5 https://www.sra.org.uk/risk/outlook/risk-outlook-2020-21/information-and-cyber-security/
6 https://www.sra.org.uk/solicitors/standards-regulations/accounts-rules/
7 https://www.lawgazette.co.uk/news/client-account-outsourcing-fails-to-take-off/5106537.article