The SRA have recently published updates to the warning notice and the case studies dealing with the prohibition on providing banking facilities.
It is worth noting the remarks made by Paul Philip, SRA Chief Executive with the release:
‘The most important aspect for all firms is the rule itself, read that first, and then have a look at the case studies for further help. Solicitors naturally will want to help their clients, but they of course must also do the right thing. If a client wants you to act in this way, you should seek to understand why they are asking you to do this and reassure yourself that you take an approach that is compliant.'
Warning notice
This contains a couple of updates, but otherwise, unsurprisingly, remains unchanged. A paragraph has been included to make the point around the need for fee earners to consider this possibility earlier on in a transaction. They should discuss clearly with the client at the outset how their money will be handled; explain what payments can/cannot be made on their behalf; ensure there is a proper bank account into which funds to be paid – i.e. one belonging to the client!
Managing a client’s expectations and properly agreeing banking arrangements at the earliest stage should help avoid some of the most common breaches, as many of these arise as a result of pressures at the eleventh hour as a result of things not being clarified at the outset.
Where the client does not have a bank account the SRA suggest that the firm considers the use of a Third Party Managed Account or another escrow facility.
The case studies
The new case studies
Based on a number of common queries, these additional examples should provide firms with some further assistance. It remains vital that each situation is assessed by a firm on the basis of the particular facts, remembering Paul Philip’s comments above regarding the rule being the starting point. The new case studies cover:
- Lender’s condition on mortgage offer
- ‘Legal advice only’ retainers
- Sale of the matrimonial home as part of divorce proceedings
- Parent paying child’s legal fees
- Conveyancing and retentions
While undoubtedly the more examples the better, it might strike some that a couple of the responses given have the appearance of a shift in tone from where we have been on this – perhaps certain responses not being 100% in line with views some have read previously to very similar scenarios.
Looking first at the case study ‘Sale of matrimonial home as part of divorce proceedings’, where the firm is acting purely on the property sale and not on the matrimonial matter. The divorce is being dealt with by two separate firms. Although the case study looks at a number of points, one question raised is regarding the payment of debts (such as a backlog of school fees) from the property sale proceeds. Even in the absence of a court order, the SRA’s view is that this would not be a breach of rule 3.3. The reasoning being this is all part of dealing with the client’s matrimonial affairs – notwithstanding the fact that the firm itself is not acting on the divorce proceedings. I think this does differ somewhat to the view many have taken on whether these payments would be a proper part of the legal work by this particular firm. It is worth noting though that a number of caveats around professional obligations are made – firms still need to ensure that they are confident that in any specific situation they won’t fall foul of the prohibition.
In another example, some may have expected a definitive response to the facts stated, i.e. the ‘legal advice only’ retainer case study. Here tax advice is being given on SDLT in a situation where the firm is not acting on a property purchase. It is difficult to see why on the bare facts, given the holding and paying of this money wouldn’t be a definite breach of rule 3.3, as opposed to being ‘likely to be’. An example of what circumstances would allow these funds to be held and paid over would perhaps have been helpful? That said, the explanation does seem to largely be making the point that there aren’t any normal circumstances that wouldn’t lead to this being a breach.
Commercial Rent Deposits update
This has been a common problem in a number of firms as a result of historic transactions where the original terms required the deposit to be held by a solicitor. While it is important that firms do not enter into new agreements that will lead to similar problems in the future, there is a recognition of the real difficulties of unravelling some older existing agreements where there will be no ongoing regulated services.
Wholesale renegotiation of these terms is agreed as being likely to be disproportionate where there is no risk to client money or other red flags present. That said, where there is an opportunity to reset the terms (such as paying the money into a landlord and tenant joint account or looking at indemnity policies), firms should do so.
Reporting accountants will still need to consider whether the firm has taken what action they reasonably can, looking at any evidence of efforts made when determining whether rule 3.3 has been breached.
Things can and do evolve, including interpretations, but this does demonstrate the difficulties in this area of the rules. It remains of ongoing importance that firms ensure everyone who handles client money within the firm is properly trained. They need to understand the detail, the principles behind rule 3.3, the warning notice, the case studies and the areas within the firm’s own work types that are more likely to lead to potential problems. Anything that may pose a risk of breaching this prohibition is likely then to be noted before the transaction takes place and can be discussed internally. Appropriate evidence and documentation should be kept to demonstrate it was a reasonable conclusion to reach at the time.
It is important that law firms are aware that their reporting accountant may come to a different conclusion – to the firm itself and in fact to other reporting accountants.
*The views expressed are the author's and not ICAEW’s.