Looking after Client Funds
A. The Solicitors’ Accounts Rules
Accounting rules are needed to protect client money. They are a manifestation of solicitors’ duty to act in the best interests of the client.
They prevent the solicitor acting fraudulently or making a secret profit from a fiduciary relationship. Looking after client funds was almost entirely based on binding rules made under the Solicitors Act 1974. These rules were then consolidated into the Solicitors’ Accounts Rules 1998.The rules on managing client funds traditionally occupied many pages in the professional rules. For example, they represented 260 pages of the 1999 edition of the Law Society Guide. The Account Rules were revised and re-presented as the SRA Account Rules for the purposes of the new SRA Handbook.[1993] Unlike other parts of the Handbook, Accounts are not dealt with as outcomes, but as rules. The 52 rules and guidance are, however, shorter than in previous versions.
The overarching purpose of the rules is ‘to keep client money safe’.[1994] Responsibility for adhering to the Rules lies with all the principals or partners of a firm, the directors of recognised bodies or licensed bodies and the COFA of a firm, whether a manager or non-manager.[1995] All must ensure compliance by everyone employed in the firm.
B. The Basic Accounting System
The system laid down by the Rules relies on the requirement to maintain two separate sets of accounts, the client account and the office account.[1996] In addition, there must be a controlled trust account to hold money that the solicitor receives as a sole trustee. Separate accounts ensure that the bank, building society or the solicitor cannot use the monies in one account for the purposes of the others. It means, for example, that funds in a client account cannot be used to satisfy the debts or expenses of the firm.
It also means that missing client money must be replaced at the solicitors’ expense, even if a deficit results from a banking error.[1997]The Rules specify what constitutes client and office money.[1998] This dictates which monies must go into the client account and which to the office account, and what withdrawals may legitimately take place from both. Any money held or received by the solicitor on account of his client must be paid without delay into the client account, unless the client instructs otherwise. This includes money paid by the client on account of costs.[1999] Where a single cheque consists of a mixture of client and office monies, the payment may be divided into each account or, if not, all of it must be paid into the client account.
C. Compliance
Some of the Accounts Rules are directed to ensuring compliance. The SRA has the power to order that any books and files must be produced at any time and place for inspection.[2000] This power overrides confidence and privilege between solicitor and client.[2001] The SRA may give brief reasons for such inspections.[2002] Secondly, annual accounts prepared by an accountant must be delivered to the SRA by the firm within six months of the end of the accounting period.[2003]
The Solicitors Act 1974 provides that the Law Society can make rules for the filing of reports on solicitors’ firms by accountants.[2004] All reporting accountants must be registered auditors. Their terms of engagement, which must be in writing, must incorporate the SRA’s standard terms. The accountant completes a standard form checklist as well as producing a report. This provides greater assurance that the audit work has actually been done.
The Solicitors Act 1974 requires an accountant to report two matters to the Law Society immediately. The first is any evidence of fraud or theft in relation to money held by a solicitor for a client, or for any other person in an account operated by the solicitor.
The second is any information that may be of material significance in determining whether a solicitor is a fit and proper person to hold money for clients or other persons.[2005] Breaches of accounts rules are the most common reasons for disciplinary complaints and penalties. The client who suffers as a result of any breach is protected by the Solicitors’ Indemnity Fund, established under section 37 of the Solicitors Act 1974.D. Interest on Client Accounts
The total amount in client account at any one time can be considerable, and interest will accrue on this balance. In Brown v IRC,[2006] the Inland Revenue wanted to charge a solicitor tax on interest in client account. The Court said that a solicitor taking this interest is unlawfully profiting at the expense of clients. The Law Society, citing administrative difficulties produced by Brown, had section 33 inserted into the Solicitors Act 1974. This stated that, except as defined in the Rules, a solicitor is not liable to account to the client for interest on client accounts.[2007]
The SRA Accounts Rules 2011 continue the trend, begun in the 1991 Rules, requiring that solicitors account to clients for any interest earned on deposits in separate, designated client accounts. They provide that solicitors must have a written policy on paying interest that they show to clients at the start of the retainer. Further, solicitors holding ‘money in a client account for a client, or for a person funding all or part of their fees, or for a trust, must account for interest when it is fair and reasonable to do so in all the circumstances’.[2008]
The SRA Accounts Rules state that they have an outcomes-focused approach ‘allowing firms the flexibility to set their own interest policies in order to achieve a fair outcome for both the client and the firm’.[2009] Extensive guidance delineates what might be seen as good practice and therefore ‘fair and reasonable’.
Some of the guidance is obvious yet extremely vague. For example, it states that ‘it is likely to be appropriate for firms to account for all interest earned in some circumstances, for example, where substantial sums of money are held for lengthy periods of time’.[2010] In other cases it is quite specific, for example, in suggesting that a firm’s rules may specify that no interest is payable on small sums, for example, under £20.[2011]It is not known to what extent solicitors benefit financially from interest on client accounts. In 1984, the Consumer Council issued a discussion paper on the issue.[2012] They estimated, conservatively, that it amounted to over £40 million a year at that time. Since 1984, the Rules have been tightened up in favour of clients, interest rates have declined and more use is now made of electronic money transfers. This means that less money is held in client accounts. Modern computing makes it possible and simple to calculate client interest and pay it to each individual client.[2013] This is clearly in the client’s best interest and it is not clear why the rules have not been amended to reflect this.
In some jurisdictions, Australia and Ontario, Canada, a proportion of interest on client accounts is paid into a foundation managed by the Law Society and devoted to supporting a wide variety of charitable and pro bono legal activities, such as educational scholarships, supporting law centres or libraries, research into the justice system and public interest advocacy centres. This was suggested for England and Wales by the Consumer Council in 1984.
More recently, Peter Goldsmith, the former Attorney General, proposed that client account interest be used to bolster pro bono legal services.[2014] It was also targeted by the Conservative Government as part of plans to boost the legal aid fund following the cutbacks made by LASPO 20 1 2.[2015] The Law Society took credit for dissuading the Ministry of Justice from pursuing this plan.[2016]
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