Banking crisis
Banking crisis practice note – 10 October 2008
1. Introduction
1.1 Who should read this practice note?
All solicitors handling client accounts.
1.2 What is the issue?
In the event of a bank's collapse, client funds could be lost. This practice note gives interim advice on mitigating any risk of liability for these funds.
1.3 Professional conduct
The Solicitors' Accounts Rules 1998.
1.4 Status of this practice note
This is interim advice. It may be updated as economic events change and in light of any legal advice provided to the Law Society. Neither the Law Society nor the Solicitors Regulation Authority (SRA) can provide financial or legal advice. The law in this area is uncertain because it has never been tested, so consider this advice in light of that.
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 in this practice note
Must - a specific requirement in the Solicitor's Code of Conduct or legislation. You must comply, unless there 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
1.6 More information
1.6.1 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.
1.6.2 Solicitors Regulation Authority
The Solicitors Regulation Authority regulates solicitors in England and Wales. It makes and enforces the Solicitors' Code of Conduct.
2 Advice summary
It is unlikely that you will be liable in negligence if client money is lost if a bank collapses, 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. If you have made any express undertakings to pay money, you must honour this even if the bank has collapsed.
- It would be prudent to advise your clients that you may not be liable to repay money lost through a banking failure. You may therefore update your terms of business to limit any liability, provided you follow Rule 2.07 of the code of conduct.
- You should make a reasonable assessment of the circumstances surrounding your individual client accounts and take any appropriate action. Factors to consider could include:
- any statements from the bank reassuring customers of its stability
- any government guarantees for depositors in UK banks, or for particular banks
- You should not attempt to limit the extent of your liability to honour undertakings.
3. 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.
- Banks must have permission from the FSA to accept deposits.
- A client account must be held at the head or branch office of a bank or building society in England and Wales - Rule 14(3).
4. Distributions of client money
You should consider moving clients' money where there are reliable public doubts about an institution's solvency. You do not need to have the same knowledge as financial experts, nor know more about an institution than is already public.
The SARs do not prevent you from:
- dividing money among separate client accounts
- distributing client money in different banks
For information on how the Financial Services Compensation Scheme would treat client's money go to http://www.fscs.org.uk/consumer/FAQs/Deposit_claims_FAQs/.
If the Scheme does cover the money belonging to each client, banks will know that you have opened a client account for multiple clients from your application to open the account, particularly as the account must have the word client in its title by virtue of rule 14(3) SAR. You do not need to write to the bank.
The £50,000 compensation limit applies to the individual client, and so if they hold other personal monies themselves in the same bank as your client account, the limit remains £50,000 in total.
You may move funds to foreign banks, provided the client bank account is held at a branch in England and Wales under rule 14(3) of the SARs. You should check any non-UK compensation arrangements that apply to these accounts.
5. Qualified undertakings
Some solicitors have asked whether they can offer qualified undertakings.
Solicitors are free to negotiate the terms of their 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.
6. Useful links
- Solicitors account rules
- Financial Services Authority
- HM Treasury
- Financial Services Compensation Scheme
- FSA Handbook