Under the updated rule 14.5 of the Solicitors Regulation Authority (SRA) Accounts Rules, the SRA have issued a warning notice on how all practitioners who have any involvement in holding or using money received for clients or others.
Rule 14.5 of the SRA Accounts Rules states: “You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”
The guiding notes further indicate that: “Rule 14.5 reflects decisions of the Solicitors Disciplinary Tribunal that it is not a proper part of a solicitor’s everyday business or practice to operate a banking facility for third parties, whether they are clients of the firm or not.
“It should be noted that any exemption under the Financial Services and Markets Act 2000 is likely to be lost if a deposit is taken in circumstances which do not form part of your practice. It should also be borne in mind that there are criminal sanctions against assisting money launderers.”
This warning notice comes into force because of improper practice that has been highlighted by the SRA in recent months.
One such case included a solicitor that was fined £1300 by the SRA for extracting his fees from a rent deposit, that was held by the firm, after the client had switched solicitors.
Harry Cottam, principal of Cottams in Birmingham, was working on granting a lease of a commercial property by a client. Because of this, the firm was responsible for the rent deposit deed.
Despite instructions to place the money in a separate deposit account, the money was secured in the firm’s general client account.
The SRA have claimed that: “Sometime later Mr Cottam’s client decided to move to a different firm of solicitors. Mr Cottam was notified of this and was asked to transfer all outstanding matters to the new firm.
“At that time, there was £6,828.24 outstanding in fees due to the firm. Mr Cottam took these fees from the £7,000 rent deposit he was holding. He then billed the client and sent the remaining funds to him.”
Cottam was rebuked, ordered to pay costs amounting to £600 and was fined £1300 by the SRA.
Harry Cottam, principal of Cottams in Birmingham, has since said: “I realize now that I should not have taken his fees from the rent deposit.”
According to the SRA and despite showing “insight and remorse for his actions,” this incident should never have taken place. A legal services practitioner should only “hold and move money for clients where doing so is related to proper instructions regarding a transaction on which you are acting or in connection with the professional services you are providing.”
Whilst the transaction may have been within the remit of the legal services being provided, protocols agreed with the client should have been followed more stringently to avoid any unnecessary ambiguity and rule breaches.
Although the warning notice “does not form part of the SRA Handbook, we may have regard to it when exercising our regulatory functions.” Indicating that any future breaches by legal service providers could be met with severe enforcement action.
Are legal service providers compliant in regularly using client accounts as a banking facility? Does handling client money and bank details form an integral part of a legal service role? Or, should legal service practitioners responsibly withdraw from such transactions?
