Client accounts not bank accounts: common problems and pitfalls
Article first published in ARDL newsletter and republished on linked in with permission.
On 6 August 2018 the SRA updated its warning notice on the improper use of a solicitors’ client account as a banking facility. Ben Hubble QC and Clare Dixon of 4 New Square look at how the prohibition on solicitors using their client accounts as banking facilities started, the way in which the rule is now interpreted and the proposed future wording of this aspect of the account rules.
The Past: the Solicitors’ Account Rules 1998 (“the SAR 1998”)
In Wood and Burdett (Case No. 8669/2002) solicitors offered, what were obviously, banking facilities to clients – cashing their cheques and making payments at their direction. However, the old SAR 1998 did not expressly prohibit the use of a solicitor’s client account as a banking facility. Nevertheless, the Tribunal found that the solicitors’ conduct was in breach of their good reputation and the good reputation of the solicitors’ profession stating that “it was not a proper use of a solicitor’s client account to allow it to be used by clients…as a bare banking facility. The proper use of a solicitor’s client account was to hold money and disburse it as required in connection with a client matter of which the solicitor has conduct on behalf of that client”. They also explained the rationale for this as being that (although it had not occurred in this case) an “unscrupulous person” could seek to utilise the facility as a “vehicle for money laundering” which was “a mischief which solicitors should actively seek to obstruct”.
A note about Wood was attached to the commentary on rule 15 of the SAR 1998. This rule was concerned with money going into and out of client account but said nothing about using the client account as a banking facility. Somewhat confusingly, however, the note specified that rule 15 fell to be “interpreted in light of” the note on Wood.
The Present: the Solicitors’ Account Rules 2011
The guidance arising out of Wood was formalized, and arguably extended, in Rule 14.5 of the Solicitors’ Account Rules 2011 which states: “You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”
Whilst the boundaries of rule 14.5 remain somewhat unclear what is clear is that changes in technology and increasing concern about money laundering mean that transactions, which were once acceptable by reason of their nature or frequency, may now be the subject of an SRA prosecution.
On 6 August 2018, the SRA issued an updated warning notice on the improper use of a client account as a banking facility which was accompanied by eleven case studies. The new release states that the intention was to help law firms understand “the types of instances when paying money into the client account [that] may or may not be acceptable”. It also stated that, in the preceding 12 months, the SRA had prosecuted 20 solicitors and three firms at the SDT for breaching rule 14.5 which had resulted in: 3 solicitors being struck off, two suspended and total fines of £763,000 which included the SRA’s highest ever fine of £500,000.
The updated warning notice highlights 4 issues which we consider in turn.
Providing Banking Facilities through a client account is objectionable in itself
This has been clear since Wood and was reiterated in Fuglers LLP v SRA  EWHC 179. The warning notice sets out the rationale for this proposition in the following terms: “You are not regulated as a bank to provide such facilities. If you do provide banking facilities for clients, you are trading on the trust and reputation from your status as a solicitor in doing so”.
There must be a proper connection between the underlying legal transaction or advice and the payments you are asked to make and receive
Clarification of the second sentence of rule 14.5 was given in Patel v SRA  EWHC 3373 where it was made clear that the relevant movement on the client account must be in respect of, not just an underlying transaction, but “an underlying transaction which is part of the accepted professional services of solicitors”.
Whilst it may have once been the case that the SRA would not prosecute an isolated payment lacking an underlying legal transaction (see Walker & Nathan (Case No. 10640/2010)) this can no longer be relied upon with any certainty. As the warning notice makes clear, modern banking facilities mean that such practices can no longer be justified on the grounds of client convenience and in any event such convenience is outweighed by the risks inherent in such actions because it allows the client to “evade [the] sophisticated controls and risk analyses that banks apply to money held for their customers”.
Risk of Insolvency
The well-known case of Fuglers exemplifies this issue. In Fuglers, the solicitors had allowed their client account to be used as a bank account for Portsmouth Football Club whose own banking facilities had been withdrawn upon the presentation by HMRC of a winding up petition. Over £10m passed through the solicitor’s account over a four month period and the solicitor decided which creditors of the Club should be paid. This was found to be in breach of rule 14.5.
The risks inherent in a solicitor permitting a client to use its account when there is an insolvency situation are now set out in the warning notice. In short using the client account in this way allows the client to have a banking facility when their normal bank may have withdrawn such facilities and, by acting as Fuglers did, there is a risk that one creditor will be improperly favoured over another.
Risk of Money Laundering
Since Wood the risk of a solicitor being used as a vehicle for money laundering has been at the heart of rule 14.5. As the warning notice puts it, a solicitor’s compliance with rule 14.5 “offers an important ‘first line of defence’ against clients or others who seek to use your client account to launder money”.
This aspect of the warning notice also makes clear that “multiple transfers of money between the ledgers of different clients or companies without evidence of the purpose or legal basis for the transfers” will be a breach of rule 14.5 particularly if they are simply carried out on request. Solicitors should therefore refuse to transfer monies between internal ledgers for, say, inter connected client companies unless there is both a proper connection between the transfer and the legal work of the solicitors and documentary evidence (such as board minutes) of the rationale for the decisions of the relevant companies. Solicitors must focus on who is their client and whether there is a proper connection between each receipt or transfer and the legal work they are undertaking.
The future: the Solicitors Account Rule 2019?
It is likely that from April 2019 a new set of accounts rules will be in force. The most obvious change will be to their length – just 7 pages. However the prohibition on the use of client accounts as a banking facility remains in the form of rule 3.3 which provides: “You must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawals from a client account must be in respect of the delivery by you of regulated services”.
The prohibition on the use of a client account as a banking facility is, it is to be hoped, relatively well known. However, the breadth of its application and the rigorousness of its enforcement may not be. The updated warning notice is another step by the SRA to address any complacency or lack of understanding on the issue which still exists.
Disclaimer: this article is not to be relied on as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.