The new rule 2.5 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”.
By holding client money after a matter has completed, a number of concerns exist.
Firstly, with the new rules being very much focussed on self-regulation and ensuring firms have sufficient systems and controls, if funds are not returned when no longer needed, how can an accountant (or the SRA) checking adequate procedures rely on the suitability and adequacy of these? This then raises possible questions as to other areas where client monies may be at risk.
Secondly, a money laundering risk occurs. If instances occur where funds have not been returned to the client, one may ask whether the client wants to avoid those funds being returned and is happier to let them stay for a period of time with the solicitor. This is something firms must be vigilant of.
Thirdly, residual balances may merge into another serious breach of the rules – that of acting as a banking facility. Solicitors are not regulated to act as bankers, as rule 3.3 makes clear. Therefore, where there is no longer any proper reason to hold funds, they should be returned to the client.
Fourthly, there is the risk that a number of residual client balances, although perhaps individually small may overall add up to a material amount. This leads to a possible danger that these may be used to cover up shortfalls in client’s funds, a concept known as “teeming and lading”.
So what changes in regards to client residual balances do the new accounts rules bring? Well in the rules themselves, much of the detail included previously has been left out but is encompassed within the accompanied guidance.
Under the old rules, it was stated that firms need to write to clients where residual balances are held at least once every twelve months and the reasons for holding them. This does not make it to new rules, but the accompanying guidelines, state that there should be systems which make sure clients 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 procedures must be in place to action this.
In the guidance that accompanies the new rules, it states that firms are allowed to pay residual balances of less than £500 on any one client matter to charity as long as they have complied with the “prescribed circumstances” which include taking reasonable steps to locate the rightful owner of the money. If the balance is over £500 on any matter the SRA may grant authority to allow the residual funds to be paid to charity following a written request. This £500 threshold has been carried forward from the old rules.
In conclusion, returning funds at the end of a matter is an integral part of the new accounts rules, and firms will be under increased scrutiny not only in respect of the number and amount of residual balances, but the systems in place to identify them in the first place. Accountants will need to evaluate all of this during their work as well as asking for evidence where monies are still being held at the conclusion of a matter as to what the practice is doing to repay these.
Robert Blech
Director at MHA Macintyre Hudson, London
robert.blech@mhllp.uk
www.macintyrehudson.co.uk
020 7429 4100
February 2020