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Holding client funds

6 October 2011

Introduction

1.1 Who should read this practice note?

Solicitors who hold client money.

1.2 What is the issue?

1.2.1 Outcomes-focused regulation

The Solicitors Regulation Authority (SRA) implemented outcomes-focused regulation (OFR) in October 2011. OFR is a move away from a rules-based approach to one that focuses on high-level outcomes governing practice and the quality of outcomes for clients.

The SRA has published a Handbook, which sets out all the SRA's regulatory requirements. It outlines the ethical standards that the SRA expects of practices and practitioners and the outcomes that the SRA expects them to achieve for their clients.

The SRA Handbook includes a Code of Conduct (the 'SRA Code'), which replaced the Solicitors' Code of Conduct 2007 (the '2007 Code'). The SRA Code establishes outcomes-focused conduct requirements and each chapter outlines outcomes and indicative behaviours (IBs).

The SRA Handbook and Code has been in force since 6 October 2011. Accordingly, the 2007 Code and all of its rules and guidance no longer apply to solicitors' conduct, save in respect of any review by the SRA of conduct taken prior to 6 October 2011 to which the 2007 Code will still be applied.

An overview of OFR can be found on the Law Society's website. This provides information on what the SRA Handbook contains, including a summary of the chapters in the Code of Conduct and a summary of the reporting requirements included throughout the Handbook.

1.2.2 This practice note

Clients who have provided funds to you following instruction may request that you continue to hold the funds pending decisions that are yet to be taken. In certain circumstances, it may be convenient for you to hold the money rather than to return and then reclaim it for work undertaken.

This practice note aims to clarify the position relating to the retention of client funds, and provides an overview of the requirements imposed upon firms under the SRA Accounts Rules 2011 (SAR).

1.3 Professional conduct

The following sections of the SRA Code of Conduct 2011 are relevant to this issue:

1.4 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.

1.5 Terminology

Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.

Should

  • Outside of a regulatory context, good practice for most situations in the Law Society's view.
  • In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).

These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.

May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.

SRA Code - SRA Code of Conduct 2011

2007 Code - Solicitors’ Code of Conduct 2007

OFR - Outcomes-focused regulation

SRA - Solicitors Regulation Authority

outcome - outcome

IB -indicative behaviour

2 SRA Principles

There are ten mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.

When thinking about how to meet the outcomes in the Code/Handbook, you must consider the principles which apply across the Handbook including the Code. You should always bear in mind what the ten principles are and use them as your starting point when implementing the outcomes.

3 Requirements under the Solicitors' Account Rules

As effective from 14 July 2008, the SRA approved a number of amendments to the SAR. The amendments introduced specific obligations for the prompt return of surplus client funds and reporting to clients if funds are retained.

Under rule 14(3) SAR you are required to return client money to your clients promptly - that is, as soon as there is no longer any proper reason to retain those funds. Payments received after you have already accounted to your client, for example by way of a refund, must also be paid to your client promptly. The rules do not define 'promptly' however, guidance note (vi) of rule 14 SAR guidance states that it should be given its natural meaning in the circumstances you find yourself.

3.1 The purpose for retention

It may sometimes be more convenient for your client for you to hold onto relevant funds than to return them if it is likely that you will need to use those funds to execute further instructions. For example, if your client is selling shares in a company following a buy-out, they might ask you to hold onto funds pending investment decisions on which you will be advising, or for other transactions in which you would be involved.

In these circumstances you should be aware of the rules governing client money, which aim to prohibit you as a solicitor from acting as a banker to your clients (see 3.5 below).

There may be also be some instances when, during the course of a retainer, the specific purpose for which particular funds were paid no longer exists. For example, the need to instruct counsel or a medical expert. Rule 14(3) SAR is concerned with returning funds to clients at the end of a matter or the substantial conclusion of a matter, and is not intended to apply to ongoing retainers. However, guidance note (vii) of rule 14 SAR states that you must always act in the best interests of your client. In these circumstances you should therefore take instructions to establish whether the money should be returned to your client or retained to cover the general funding or other aspects of the case.

3.2 Informing your client

If funds are to be retained, rule 14(4) SAR states that you must:

  1. inform your client promptly in writing to provide details of the amount held at the end of the initial matter for which you were instructed and the reason for continued retention of funds.
  2. inform your client in writing at least once every twelve months thereafter, of the amount of their money that you retain and the reason for that retention, for as long as you continue to hold it.

3.3 Surplus funds

Accounting to a client for any surplus funds will often fall naturally at the end of a matter. Guidance note (vi) of rule 14 SAR refers to other retainers that may be more protracted; even when the principal work has been completed, you may still need to retain funds, for example, to cover outstanding work in a conveyancing transaction or to meet a tax liability. Again, in such circumstances you should inform your client promptly in writing and provide details of the amount held at the end of the matter and the reason for retention, as set out in rule 14(4) SAR.

3.4 Holding client money outside of the client account

Rule 15(1) SAR allows you to hold funds outside the client account by, for example, retaining it in a safe in the form of cash, or placing it in an account in your name which is not a client account. This rule relates to situations where money should properly be held in a client account, but your client has given instructions that the money should be held by you outside the client account for his or her own convenience.

This envisages an ongoing retainer, not simply a means of holding money for your client. In these circumstances instructions must be given by your client in writing, and you must also ensure that you are complying with the record-keeping provisions of rule 29 SAR where necessary. You should also note that it is improper to establish ongoing arrangements in relation to a particular client (blanket agreements) to hold funds outside the client account (rule 15(2) SAR). For further information see the Law Society's practice note on anti-money laundering.

3.5 Solicitors as bankers

The Solicitors Disciplinary Tribunal has determined that, as a solicitor, it is not a proper part of your everyday business or practice to operate a banking facility for third parties, whether or not they are your clients. As stated in guidance note (v) of rule 14 SAR, any exemption under the Financial Services and Markets Act 2000 (see section 4) is likely to be lost if a deposit is taken in circumstances which do not form part of your practice.

With this in mind, you should assess each case on its own merit based upon the individual circumstances that present themselves. If there is a good reason to continue to hold your client's money pending its investment or use in further transactions on which you continue to advise and act, it is unlikely that this would amount to a breach of the SAR. However, you should review this position if there is likely to be any significant delay in receiving further instructions.

4 Exemption under the Financial Services and Markets Act 2000

Under the Financial Services and Markets Act 2000 (the Act) the Financial Services Authority (FSA) is the single statutory regulator of financial services business. Under the Act, if you undertake 'regulated activities' you are required to either:

  • be regulated by the FSA, or
  • rely on the Part XX exemption

This exemption makes special provision for professional firms which do not carry on mainstream investment business but which may carry on regulated activities in the course of other work such as conveyancing, corporate, matrimonial, probate and trust work. This enables firms regulated by the SRA which meet certain conditions to be treated as exempt professional firms and to carry on activities known as exempt regulated activities.

If your firm qualifies for this exemption, you do not need to be regulated by the FSA, but will be able to carry on exempt regulated activities under the supervision of and regulation by the SRA. However, If you take a deposit from your client in circumstances which do not form part of your practice as a solicitor, you are likely to lose the exemption.

You should therefore ensure that the purpose for retention of your client's money is confirmed in writing and kept under review so that your exempt status is not placed at risk.

5 Money laundering

You should be cautious when being asked to hold onto sums of money by your client, and to be mindful that there are criminal sanctions against assisting money launderers. Please refer to our anti-money laundering practice note for further information in this area, and to assist you in meeting your obligations under the UK anti-money laundering and counter-terrorist financing regime.

6 More information

6.1 Legal and other requirements

6.2 Further products and support

6.2.1 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.

6.2.2 Law Society Practice notes

6.2.3 Law Society publications

 
 
 

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