SRA makes new client account warning
The Solicitors Regulation Authority (SRA) has reminded managers and compliance officers that shortages in the client account will not be tolerated.
A newly-issued warning notice outlines the risks of firms failing to quickly address a shortage. It also dictates to firms thinking of shutting down that this cannot happen until client money is returned.
The timing of the warning notice will raise eyebrows in the profession: there does not appear to have been any spike in sanction decisions relating to client account shortages.
The biggest discovered shortage in a client account in recent years is the £64m missing from client funds held by Axiom Ince, which was shut down by the regulator last year. The SRA is under investigation by the Legal Services Board for the way it handled the firm as it descended into eventual closure.
The SRA’s updated warning notice states that, whatever the underlying reasons, firms have an obligation to replace immediately any money missing from the account.
Paul Philip, SRA chief executive, said:
“Caselaw is very clear that the client account is sacrosanct.
“However, firms do report shortages on the client account for a variety of reasons.
“Our rules are also very clear – you must make good on any deficit promptly.
“A shortage on the client account presents a risk to all clients for whom you hold money.”
The warning notice states that there is a clear duty in the accounts rules to replace a deficiency, and that managers of a firm are jointly responsible for doing so.
Even where a shortage has occurred due to circumstances beyond a firm’s control, such as theft or a cyber-attack, there remains an obligation on the firm and its managers to replace the shortage.
Firms that continue to transact with a shortfall on their client account risk using other clients’ funds to facilitate those transactions, the SRA states. Managers are advised to immediately investigate and take action against any member of staff who may have acted dishonestly regarding the client account, and to take regular steps to monitor, review and manage risks.
Behaviour to look for amongst employees includes a failure to deliver bills or a written notification of costs, any suggestion of over-charging and a sweeping up of residual balances.
On enforcement action, the SRA warns that failing to replace client money will usually lead to an intervention, and that even if money has been replaced it may be that an intervention is necessary to deal with what caused the problem.
Any firms seeking to close should send all client money to clients, pay counsel fees and bill for outstanding costs.
The notice adds:
“If your client account has a shortage, you cannot undertake any of these actions and therefore you cannot close your firm until the shortage is replaced.”
Kindly shared by The Law Society Gazette
