Up to date advice on protecting client money

Today’s Conveyancer invited Lawyer Checker to advise protecting client money, as part of our SRA Risk Outlook 2016 series.

Key Risks

A consistent and large risk within the legal sector is the holding and transacting of client money. Certainly from what we have seen at Lawyer Checker, it is easy to see why. The continued presence of bogus law firms, evolution of sophisticated fraudsters targeting law firms and anti-money laundering concerns such as heavy regulation and the misuse of client money, have all been contributing factors to the ever-increasing risks.

The old adage of ‘it won’t happen to us’ can no longer be used as an excuse, and should never be an accepted way of thinking amongst firms. Fraud is beginning to hit home to many as a reality; the increasing number of bogus firms stealing identities of existing firms or individuals reflect this. With residential property transactions continuously increasing, you can see why this is an attractive proposition for fraudsters. The SRA Warning Notice from June 2015, which focused on money missing from client accounts, stated if you identify that money is missing, you have a duty to take steps to ensure it is replaced in full, immediately.

The definition of client money is currently undergoing consultation as part of the changes of Accounts Rules. All regulated firms and individuals will be under a core obligation to keep money and assets safe. There may even be the potential for some firms to have third party managed accounts. This would effectively mean an alternative to having a client account if that suits them.

Outcomes

There is a very clear risk of client harm and reputational damage. Firms who do not protect client money can indirectly (and directly) create a cost to other law firms. Reports to the SRA regarding misuse of money remain at around 100 per month.

Operating a client account when it is deficient may make you liable for breach of trust and failure to act in the best interests of your clients. If you cannot replace the missing money and your insurers do not do so very promptly, you may be lawfully unable to operate the account. You will have to consider the position as a matter of trust law, including whether you need to apply to court for directions as a trustee.

The message has clarity. Those who can evidence that they do more and have the necessary risk management structure in place to ensure compliance, will meet the requirements set out when it comes to protecting client money.

Case Study

The case of R A Legal v Santander (2014) is undoubtedly one you will all know, with the outcome meaning that s.61 no longer offers the protection it has historically. There is now a precedent requirement for conveyancers to be able to demonstrate that at every stage they have acted reasonably. This effectively states that the burden of proving the conveyancer acted ‘reasonably’ is on the defendant and it should take into account all elements of reasonableness in its broadest term; not just whether the loss would have not occurred ‘but for’ the conveyancing failures.

You have a professional obligation to ensure that you are acting in the best interest of your client, the lender, the public and you are able to evidence that you have taken all reasonable steps to ensure that all parties in a transaction are in fact who they say they are.

In addition to having a Mortgage Fraud Policy, which should be regularly reviewed as criminals change tactics frequently, you should use alternative risk mitigation assessments in order to mitigate against the ever increasing mortgage fraud risk that face law firms today.

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Today's Conveyancer