In 2015, former Law Society council member Michael Webster was jailed for eight months after being found guilty of making five fraudulent transactions from his law firm’s client account to the value of £75,605.27. Mr Webster, who was also struck off the Roll of Solicitors, was ordered to pay £48,000 to a Latvian-based indemnity insurer.
Client account discrepancies can cause the public to lose trust in the legal profession; therefore, it is taken extremely seriously. In 2015, 19% of cases before the Solicitors Disciplinary Tribunal (SDT) involved breaches of the SRA Accounts Rules.
If it is found client money was misappropriated by a solicitor dishonestly, as was the case with Mr Webster, it is almost inevitable the solicitor in question will be struck off the Roll. The reason for such strict penalties is the client account is considered sacrosanct and must not be touched other than in accordance with the Accounts Rules.
Rule 6.1 provides that principals of the firm are strictly liable for any breaches of the Account Rules. Therefore, it is imperative those in the most senior positions understand the rules themselves and provide adequate training to all staff to ensure not only the Accounts Rules are being followed, but any anomalies are reported immediately.
The desired outcomes of the SRA Accounts Rules 2011
When training courses and subsequent updates relating to the rules are delivered throughout a firm, it is especially important to explain to staff members the underlying objectives behind them, therefore making it easier to achieve compliance.
The objective of the SRA Accounts Rules is to ensure:
- client money is kept safe at all times;
- clients and the public have confidence that client money held by firms will be safe;
- firms are managed in such a way, and with appropriate systems and procedures in place, so as to safeguard client money;
- client accounts are used for appropriate purposes only; and
- the SRA is aware of issues in a firm relevant to the protection of client money.
Rule 6.1 and strict liability
Rule 6.1 of the Accounts Rules states:
All the principals in a firm must ensure compliance with the rules by the principals themselves and by everyone employed in the firm. This duty also extends to the directors of a recognised body or licensed body which is a company, or to the members of a recognised body or licensed body which is an LLP. It also extends to the Compliance Officer for Finance and Administration (COFA) of a firm (whether a manager or non-manager).
Strict liability under Rule 6.1 extends to all partners, be they junior or senior and whether or not they have access to the client accounts.
It is crucial that principals of a firm being investigated by the SRA for breaching the Account Rules bear in mind the strict liability under Rule 6.1 and ensure they have a legal representative present when answering any questions relating to the breach.
Paying back the client account in the event of a breach
If a breach of a firm’s client account is discovered, Rule 7.1 states it must be immediately remedied. Remedial action will include replacing any money which has been misappropriated.
Confusing, complex and unclear?
According to an article in the Law Society Gazette, many members of the legal profession found the 2011 Accounts Rules unclear and complex .
Following consultations in 2016, the SRA proposed the term ‘client money’ would be tapered to allow money paid for fees and disbursements for which the solicitor is liable, such as counsel’s fees, to be treated as the firm’s money.
Money held for payments for which the client is liable, such as stamp duty land tax, will remain client money and must continue to be held in the client account.
The SRA also proposed to provide an alternative to the holding of client money through the introduction of ‘clear and consistent safeguards’ around the use of third-party managed accounts as a mechanism for managing payments and transactions .
The new SRA Handbook, which will contain the revised Client Account Rules will be published after autumn 2018.
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