Following on from my article back in March, given the SRA recently issued a further guidance note (dealt with below) it seemed an appropriate time for an update on residual balances.
Rule 2.5 of the Solicitor Accounts Rules 2019 states: “You ensure that client money is returned promptly to the client, or the third party for whom the money is held, as soon as there is no longer any proper reason to hold those funds”.
As this one rule does not add much meat to the bones, there has been various guidance issued to accompany it.
For example, “Helping you keep accurate client accounting records” states that there should be systems which make sure clients (or other people on whose behalf money is held) are regularly informed when funds are retained for a specific reason at the end or the substantial conclusion of a matter. Being “regularly informed” suggests that this should be more often than annually, and a reason must be in “respect of the delivery by you of regulated services”.
The new rules kept the limit in place of £500, under which no SRA authority to withdraw this money from client account is required. For balances over £500, the SRA updated its guidance as recently as 8th October this year.
This relates specifically to larger balances when written authority is required from the SRA. Such a request needs to be made in writing and can be done by anyone on behalf of a regulated firm. Therefore, a firm’s accountant could make an application although the authority will be granted to the entity itself.
When an application is made the SRA will look to see that “adequate attempts to trace and repay the rightful owner” have been made.
An assessment will be made by the SRA which will consider the amount of money and the length of time it has been held for, the steps taken to trace the owner, the costs involved of making further enquires and the likelihood of success in tracing the client given the information available to the firm. Much of this seems to be dependent on the age of the residual balance. The SRA will also consider where the money will be paid to – charity or the firm’s business account.
The firm will have to provide evidence of what “adequate steps” they have taken to locate the client. There may be a tendency for fee earners to take the opinion that they haven’t heard from the client for months or years and therefore an application should be made. In order to prevent such an approach, the SRA will consider whether the costs of taking steps to trace the client (or third party) are proportionate in relation to the balance.
Some actions to trace the client will of course not result in an outlay for the firm. Whereas tracing services and newspaper advertisements will have a cost, the use of social media and searches on Companies House will not.
As a minimum, the SRA would expect firms to make use of the Department of Work and Pensions (DWP) letter forwarding service, in addition to free online searches.
The SRA will grant the relevant authority where they are satisfied that adequate attempts have been made to trace and repay the owner of the funds, and they cannot be found or won’t accept the monies.
Once an authority is granted it will record both who the funds are owed to as well as the amount and will usually impose a condition on the firm that they must pay the balance, plus accrued interest to a charity of their choice. The interest calculated should be in line with the practice’s policy. Of course, there is always the possibility that following discharging these funds, the client will reappear requesting their money back. A condition to granting the authority is that the firm will need to obtain a non-time limited indemnity from the charity in case the client or third party does subsequently ask for their money back.
There are situations where the SRA will not grant an authority for withdrawal. These are where the monies are owed to a dissolved company and in respect of estate matters. If a company is dissolved, outstanding monies must be paid to the treasury solicitor and if an entity is incorporated overseas, to the crown. With respect to estate matters, the executors are the client and they must be contacted as to how the residual balance should be dealt with.
The guidance concludes with some useful examples and the payment of out of pocket expenses. The firm has no legal authority to deduct costs they may have incurred in attempting to trace (or communicate) with the client. When granting authority though, the SRA may take into account “reasonable” out of pocket expenses such as DWP fees and advertising costs. It is important to note however that if the client later reappears the law firm are liable to repay back the original full amount.
In conclusion, although much remains the same from its previous incarnation, this guidance puts together quite neatly the circumstances and issues that many firms face when the need to return monies over £500 arises.
The views expressed are the author’s and not ICAEW’s.
Robert Blech
Director at MHA Macintyre Hudson, London
Member of ICAEW Solicitors Advisory Group
robert.blech@mhllp.uk
020 7429 4100
October 2020