1. Introduction
1.1. Who should read this practice note?
All solicitors handling client accounts.
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1.2. What is the issue?
In the event of an authorised deposit taking institution collapse, funds held on behalf of clients could be affected and may be eligible for compensation. As a result of changes to the rules governing payout of compensation in such an event, the Financial Services Compensation Scheme has introduced new processes and technology to enable faster payout.
This practice note reflects developments in the framework governing deposit protection and provides best practice advice for practioners. You should note, however, that the law in this area has not been tested and is currently uncertain.
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2. Liability for client money following institution collapse
It is unlikely that you will be liable in negligence if client money is lost following the collapse of a deposit-taking institution, as long as you have placed the money in accordance with the Solicitors' Accounts Rules. However, any final decision on this is for the courts.
Any express undertakings you have made to pay money must be honoured, even if the institution with which they were deposited has collapsed.
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2.1 Solicitors' Accounts Rules 1998 (SARs)
You must place client money in a client account at a bank or building society, as defined in section 87 of the Solicitors Act 1974. These institutions must have permission from the FSA to accept deposits. A client account must be held at a branch or a head office in England and Wales - Rule 14(4).
You must ensure that your clients gain a reasonable rate of interest on their money, but you do not need to obtain the best rate (See rules 24-25 Solicitors' Accounts Rules ).
At a time of volatile interest rates, you should check the interest rates paid on client accounts and consider whether it is appropriate to change deposit taking institutions in the light of the deals available. In deciding, you should consider factors such as access to the money, the administrative costs of changing deposit-taking institution and whether the new deposit-taking institution is covered by the Financial Services Compensation Scheme (FSCS).
The SARs do not prevent you from:
- dividing money among separate client accounts; or
- distributing client money in different deposit taking institutions.
Read the Solicitors' Account Rules (SARs)
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2.2 Limiting liability
To limit liability you may update your terms of business provided you follow Rule 2.07 of the code of conduct. You may also state in your terms of business that if you make a claim under the Financial Services Compensation Scheme (FSCS) in respect of client money on your clients' behalf, you will, subject to their consent, give certain client information to the FSCS to help them identify clients and any amounts to which they are entitled.
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3. Financial Services Compensation Scheme (FSCS)
The FSCS is the UK's statutory fund of last resort for customers of financial services companies. The FSCS can pay compensation to consumers if a company is unable (or likely to be unable) to pay claims against it.
Recent changes to the European Deposit Guarantee Scheme Directive (DGSD), and corresponding UK legislation, have brought about significant changes for the FSCS. There has been an increase in the compensation limit for eligible claimants in the event of failure of a deposit-taking firm. As from 1 January 2011, the amount the FSCS can pay out in compensation has increased from £50,000 to £85,000 (equivalent to the €100,000 compensation limit set out in DGSD). See FSA guidance on limits.
Other changes include a requirement to pay deposit compensation for verified claims within 20 working days of the failure of a deposit taking institution.
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3.1 Eligibility criteria
Eligible claimants include individuals and small companies.
For the purposes of the FSCS a small company is determined by reference to Sections 382 - 384 of the Companies Act 2006. In order to satisfy the 'small company' test, a company must satisfy two of the three thresholds.
Currently these are:
- Annual turnover must be not more than £6.5m.
- The balance sheet total is less than £3.26m.
- The average number of employees must be not more than 50.
You should familiarise yourself with the relevant provisions of the Companies Act 2006 insofar as they may apply to the 'small companies' regime.
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3.2 Considerations for client accounts
The FSCS deposit protection scheme applies to client money in the same way as it applies to private/individual deposits. Therefore the FSCS protects the first £85,000 deposited, with an authorised deposit-taking institution, on behalf of a client. Note that the £85,000 FSCS limit applies to the individual client, and so if they hold other personal monies themselves in the same deposit-taking institution as your client account, the limit remains £85,000 in total for that individual.
Read more about deposit claims
You do not need to write to the deposit-taking institution to confirm that an account was opened on behalf of clients. Deposit-taking institutions will know this from your application to open the account, particularly as the account must have the word 'client' in its title according to Rule 14(3) SARs.
It is important to note that the protection only applies per banking licence. Some authorised deposit-taking institutions have several brands that are covered by one banking licence. Therefore it is possible to have money deposited with several deposit-taking institution brands but for them to be covered by only one licence. In these circumstances only the first £85,000 is protected for each individual.
Mergers and takeovers in recent years have complicated the picture significantly. It may be useful for you to ascertain whether the accounts you hold client money in are covered by one banking licence or several.
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3.3 Accounts in foreign deposit-taking institutions
Some overseas European Economic Area (EEA) banks with branches in the UK have arrangements with the FSCS to top up any difference between the level of compensation in the bank's home state scheme and the UK.
These branches are listed on the FSCS website. You should note that deposit-taking institutions in the Channel Islands and Isle of Man are not covered by the FSCS.
You may move funds to foreign deposit-taking institutions provided that the client's account is held at a branch in England and Wales under Rule 14(4) of the SARs.
You can check whether the deposit-taking institution is registered with the FSA by looking at the FSA online listing.
The FSCS distinguishes between branches of foreign banks and subsidiaries of foreign banks:
- Branches of foreign banks : In these cases you should normally make an application to any relevant scheme in the bank's home country.
- Subsidiaries of foreign banks : In these cases the FSCS will compensate for loss in the same way as for UK banks.
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4. Actions for making compensation claims
If a deposit-taking institution collapses, you should:
- contact the FSCS with details of all clients whose money is held in an account with the collapsed deposit-taking institution, including their full name and address details.
- tell the FSCS the amount in the account to which each client is entitled (with supporting evidence).
- ensure that you inform FSCS whether monies held in a client account are due to be paid to the Legal Services Commission or are held on trust for a third party who is not your client.
You must seek the consent of your clients before providing the FSCS with the details described in 1 and 2 above. If an individual client does not give consent, the FSCS will still need to know the account balances, but you may withhold the identity of the client. In this latter case, the client will not be able to receive compensation from the FSCS.
The need for consent may delay the payment of compensation beyond the 20 day payment threshold, depending on how quickly it can be ascertained by you.
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4.1 Providing information to the FSCS
The FSCS has created a template excel spreadsheet for completing the information required. The template can be downloaded from the FSCS website at www.fscs.org.uk. Once complete, it should be emailed to beneficiaries@fscs.org.uk.
You may have a general client account into which you deposit the monies of a number of clients. You may even have a number of general client accounts within one or across many deposit-taking institutions. One template spreadsheet should be completed for each client account.
For more information on how the FSCS processes compensation payments see the FSCS guidance pages.
4.1.1 Single client accounts
In cases where there is one account per client and a deposit-taking institution becomes insolvent (requiring the FSCS to pay compensation) it should be relatively straight forward to identify the client and the amount to be refunded, subject to the amount being less than or equal to the compensation limit.
4.1.2 Multiple client accounts
In cases of several client accounts a separate template must be completed for each account. If you have records of where each individual client's money is held you should notify the FSCS of the following details:
- the amount held on behalf of the affected client
- their entitlement to the funds in the relevant account, and
- their contact details
This information should be clear from your accounting records. You must ensure that you have the consent of your client to pass on these details to the FSCS.
In some cases it may be difficult to identify which individual client's money is held in which general client account. In such cases the FSCS will still expect you to fill out a template for each account held with the insolvent institution detailing the individual amounts of money held on behalf of each client in the affected client account or accounts.
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4.2 Seeking additional funds
You may need to seek additional funds from clients according to the proportion of the total funds held in the failed deposit-taking institution if you are to complete transactions for them before they receive compensation.
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5. Information for your client
Informing your client about how their money is held will help you manage the situation following the collapse of a deposit-taking institution.
You should do the following:
- Explain it is unlikely that you will be held liable for losses resulting from a banking failure.
- Tell them the name of the deposit-taking institution in which their money is held.
- Explain that the £85,000 FSCS limit applies to the individual client, and so if they hold other personal monies themselves in the same deposit-taking institution as your client account, the limit remains £85,000 in total.
- Explain that if a corporate body client is not considered a small company by FSCS, then they will not be eligible for compensation.
- Tell them that some deposit-taking institutions have several brands, ie where the same institution is trading under different names. Clients should check either with their deposit-taking institution, the FSA or a financial adviser for more information.
- Seek consent for the disclosure to FSCS of client details in the event of a deposit-taking institution failure.
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6. Qualified undertakings
Some solicitors have asked whether they can offer qualified undertakings.
You are free to decide whether to offer or accept an undertaking, so long as to do so is not against the client's interests. You do not need to give an undertaking simply because it is in the client's interests to do so. You may also negotiate the terms of the undertakings, where this is in the best interests of clients.
However, in residential conveyancing transactions, it is highly unlikely that buyers' solicitors could properly accept offers of a limited undertaking in their clients' best interest. Also, offering such an undertaking may breach the obligations of sellers' solicitors to their clients, depending on the terms of their retainer.
For further information on conveyancing undertakings to discharge mortgages see both:
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7. More information
7.1 Professional conduct
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7.2 Further advice and products
7.2.1 Practice Advice Line
The Law Society provides support for solicitors on a wide range of areas of practice.
Practice Advice can be contacted on 0870 606 2522 from 09:00 to 17:00 on weekdays.
Visit the Practice Advice Service website.
7.2.2 Solicitors Regulation Authority
The Solicitors Regulation Authority regulates solicitors in England and Wales. It makes and enforces the Solicitors' Code of Conduct.
SRA website
7.2.3 Financial services authority (FSA)
The FSA provides the following information:
7.2.4 Financial services compensation scheme (FCSC)
The FSCS is the UK's compensation fund of last resort for customers of authorised financial services firms.
7.2.5 HM Treasury
HM Treasury website
7.2.6 Law Society publications
7.2.7 Training and events
- CPD course: Solicitors Accounts Rules 1998
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7.3 Status of this practice note
Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.
Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them. For queries or comments on this practice note contact the Law Society's Practice Advice Service.
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7.4 Terminology in this practice note
Must - a specific requirement in the Solicitor's Code of Conduct or legislation. You must comply, unless there are specific exemptions or defences provided for in the code of conduct or relevant legislation.
Should - good practice for most situations in the Law Society's view. If you do not follow this, you must be able to justify to oversight bodies why this is appropriate, either for your practice, or in the particular retainer.
May - a non-exhaustive list of options for meeting your obligations. Which option you choose is determined by the risk profile of the individual practice, client or retainer. You must be able to justify why this was an appropriate option to oversight bodies.
You - a practice.
Authorised institution/authorised deposit-taking institution – a financial institution granted a banking licence by the Financial Services Authority to hold deposits e.g. banks and building societies.
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