Can you justify holding client funds?
At the end of last month the Law Society updated their practice note which provides guidance on holding client funds. The Law Society advise that the updated guidance should be read by all solicitors who hold client money.
Under rule 14(3) of the SAR (Solicitors Accounts Rules), solicitors are obliged to return client money promptly, i.e. as soon as there is no longer any justifiable reason to retain those funds. A justifiable reason, for example, may include when a client requests that you hold onto money pending a decision that is yet to be taken, such as funds awaiting an investment decision. Those practising in conveyancing may also have to retain funds to cover outstanding work.
Following a warning notice issued in December 2014, the Law Society have updated the practice note to once again stress that holding onto client money should not be used as a banking facility. They state it is not a proper or everyday part of a solicitors job description to conduct banking services. The Law Society advise that each singular case of whether to hold money or not should be assessed on the individual circumstances. If there does exist a valid reason to continue to hold onto funds then this would unlikely be a breach of the SAR.
The note also updates the exemption under the Financial Services and Markets Act 2000, following the extension of transitional arrangements with the Financial Services Authority until 31st October 2015. The SRA advises that:
“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.”
The SRA go on to advise that the purpose of why a client’s money is being retained should be confirmed in writing and subsequently kept under review, so that a firms’ exempt status is not placed at risk.
The client should also be informed, in writing, as to why the funds are being retained and the exact amount you are holding. The client should be given an update with these same details at least once every 12 months if you continue to hold the funds.