Residual client account balances
In February 2007, we published a consultation on the treatment of surplus funds when a solicitor continues to hold client money following the conclusion of a retainer and cannot return the balance to the client. The consultation period ended on 7 May 2007.
The results of the consultation favoured the introduction of a system of self-certification for the withdrawal of smaller amounts, and continued prior SRA authorisation for larger amounts, coupled with a specific obligation to return surplus funds to a client in a timely manner.
The following proposals, put forward by the Rules and Ethics Committee, have been approved by the SRA Board:
- the introduction of a specific obligation to return surplus funds to a client once there is no longer any proper reason to retain those funds (eliminating the need to specify a period of time);
- the introduction of a requirement to inform clients at the end of a matter if funds are retained and for what purpose, and to report to clients on an annual basis if funds continue to be held;
- the replacement of the current system for the withdrawal of residual client account balances by a hybrid system of self-certification, subject to safeguards, for amounts of £50 or less, and continued prior SRA authorisation for larger amounts.
The Law Society's Council will be asked to make the amendment rules at its meeting on 19 March 2008. Any rule changes require the concurrence of the Master of the Rolls. The changes will take effect three months from the date of the Master of the Rolls' concurrence.
Our consultation discussion paper, a summary of responses and a statistical analysis of responses are available below.
In the course of practice, solicitors hold money for their clients. They may hold money for an individual, for example in relation to buying or selling a house, or obtaining compensation following an accident. Other solicitors may hold money for a corporate client, perhaps in relation to buying or selling a business.
The holding of client money by solicitors is governed by the Solicitors' Accounts Rules 1998 (SAR).
The bulk of money held by a solicitor for a client will be utilised in the course of the work carried out for the client. For example, a mortgage advance will be sent to the buyer's solicitor to complete a house purchase, and legacies due to beneficiaries will be sent out once an estate has been wound up.
Once a matter has been completed, any leftover funds which a solicitor is still holding must be returned to the client, but the SAR do not specify how quickly this must be done.
The SRA believes that solicitors should, whenever possible, deal with client money left over at the end of a matter in a timely way.
From time to time, solicitors find that they are holding money for clients which was not returned at the end of a matter. Reasons vary from, for example, refunds received by the solicitor after the conclusion of a matter to inaccurate bookkeeping. The client may in the meantime have moved house or changed premises and not left a forwarding address.
If a client cannot be traced, solicitors must obtain permission from the SRA before they can withdraw that client's money from client account (see rule 22 SAR). The solicitor must provide evidence as to the steps taken to identify the rightful owner of the funds, and to trace (perhaps by advertising or using an enquiry agent in appropriate circumstances) and reunite that person with the money. Depending on the amount involved, the firm's accountant may be asked to verify the information supplied by the solicitor. The SRA normally requires that the money is then donated to charity on the basis of an undertaking from the charity to refund the money if the client is subsequently traced or reappears.
In 2006, permission was given in approximately 300 cases to withdraw client money, where the client could not be traced. This figure has remained fairly constant over the last few years. By contrast with the millions of pounds handled by solicitors for clients each year, the leftover funds dealt with in applications to the SRA are very low. A typical application comprises several residual balances held for more than one client (solicitors tend to accumulate leftover balances and deal with them in one application to the SRA). It is unusual for a large sum to be left over in respect of just one client.
You can download examples of the way in which applications are handled by the SRA.
Any surplus money belonging to a client at the end of a matter should be returned to the client within a reasonable time. If the solicitor fails to do so, for whatever reason, the solicitor will still have to repay that amount to the client should he or she subsequently be traced or reappear, even if in the meantime the money has been paid to charity.
It may be appropriate, depending on the amount involved, for a solicitor to incur expenses in trying to trace a client, for example in engaging an enquiry agent or advertising. These expenses may reduce the final amount payable to the client or, if the client cannot be found, the amount donated to charity.
It would not normally be appropriate for a solicitor to charge for his or her own time in attempting to trace a client and dealing with any surplus money, as that work is part of the retainer for which the solicitor has already been paid.
Some solicitors feel that the present system of SRA authorisation is administratively burdensome. They suggest that the SAR should be changed to allow solicitors to withdraw leftover money from the client account, without prior authorisation, where the client cannot be traced, in order to make a payment to a charity.
Please indicate which of the following options you support:
- an amendment to the Solicitors’ Accounts Rules 1998 to permit a solicitor, within a prescribed framework, to withdraw money from client account, without prior SRA authorisation, where the solicitor has been unable to return the funds to the rightful owner; or
- retention of the current system which requires prior authority for the withdrawal of client funds.
Risks of removing the requirement for prior SRA authorisation
The removal of the obligation to obtain prior SRA authorisation raises two principal regulatory concerns:
- The fundamental purpose of the SAR is to safeguard client money. If the requirement for authorisation is removed, solicitors might feel that they can be less diligent in finalising matters and accounting to clients. In extreme cases, there could be a temptation to dishonesty.
- Public confidence in the profession may be compromised if there is no independent scrutiny of the steps taken by the solicitor to try to locate the rightful owners, and to return clients' money. (Approximately 5-10 per cent of clients are traced as a result of solicitors going through the formal authorisation process and being prompted to take additional steps to trace the client.)
Do you think that the reduction in the level of independent scrutiny in the proposed new self-administered scheme may result in solicitors taking a less robust approach to the safeguarding of client money and the keeping of proper accounting records?
Do you think that there is an increased risk of dishonesty if a new self-administered system is introduced?
Limiting the risks
The protection of client money would necessitate the introduction of a sufficiently robust framework within which solicitors would have to work if they were to be allowed to withdraw surplus money from client account without prior SRA authorisation.
Any system of withdrawals from client account operated by solicitors themselves, without prior authorisation, would arguably need to include protections equivalent to those afforded by the current system, in particular to:
- identify the owner of the money, or make reasonable attempts to do so;
- make adequate attempts to ascertain the proper destination of the money, and to return it to the rightful owner, unless the reasonable costs of doing so are likely to be excessive in relation to the amount held;
- obtain a letter from the firm's accountants confirming the information set out above, unless the cost of obtaining an accountant's letter would be excessive in relation to the amount involved;
- pay the withdrawn funds to a charity which gives an indemnity against any legitimate claim subsequently made on the money, or makes suitable insurance arrangements;
- keep a written record of the steps taken for at least six years;
- keep all relevant documentation (including receipts from the charity and any accountant's letter) for at least six years.
The solicitor's reporting accountant would check for compliance with the requirements of the new system when preparing the annual report to the SRA on a solicitor's overall compliance with the SAR.
The removal of independent scrutiny before the withdrawal of residual client account balances would mean that solicitors should also be prepared to justify their decisions to withdraw such funds from client account, if called upon to do so by the SRA.
Do you think that the safeguards outlined above strike a proper balance between the solicitor's duty to return surplus client balances, and the benefits of solicitors being able to clear residual client account balances in a timely and administratively convenient fashion?
Do you think that the proposed requirements are sufficiently stringent to safeguard clients' interests? Please state any suggestions you may have to strengthen the proposed safeguards.
Do you think that the proposed requirements are overly prescriptive?
Another safeguard might be to impose a limit on the amount which a solicitor may withdraw from client account without permission from the SRA in respect of any one matter. Such a provision would give a degree of independent scrutiny in respect of larger sums. A procedure which combines prior authorisation for larger amounts, with solicitors dealing with lower amounts themselves, might be considered more proportionate from a regulatory point of view.
Do you think there should be a limit on the amount which a solicitor may withdraw from client account without permission from the SRA in respect of any one matter? If so, what do you think that limit should be?
A further safeguard might be to require solicitors to submit an annual return to the SRA setting out details of each individual sum paid to charity under the proposed regime.
Do you think that any new system should impose a requirement for solicitors to make an annual return to the SRA of the sums paid to charity?
Retention of the existing regime
If the existing system of obtaining prior SRA authorisation before withdrawing leftover money from client account is retained, either instead of a new self-certification scheme, or only for larger sums over a set amount (with solicitors dealing with smaller amounts themselves), the question arises whether the existing regime can be improved.
The guidelines setting out the operation of the existing system under the SAR are currently being updated to reflect the more flexible, proportionate approach which has developed over time. For example, the original requirement for solicitors to have held a leftover balance for six years before applying for SRA authorisation has been replaced with a less rigid approach, although some applications may be deferred when, say, a large sum is involved and it would be appropriate to take further steps to trace the client.
The main protections given by the current system are referred to in paragraph 7 above. You can download examples of the way in which applications are handled by the SRA.
Do you think that the current system, if retained, could be improved? If so, please indicate your suggestions for improvement.
Cost to the SRA of the existing regime
Some may feel that the cost to the SRA of administering any scheme of prior authorisation should be borne by those solicitors who make applications. This may be unfair where a balance has arisen through no fault of the solicitor, and the client is impossible to trace. However, when a solicitor has been unable to return the funds because of poor bookkeeping or inappropriate delay, it may be that the cost to the SRA should be borne by the solicitor. If the SRA is able to charge solicitor applicants, your views on whether it should do so in appropriate circumstances are sought.
Do you think that the SRA should, if it is able to do so, recover from the applicant solicitor, in appropriate circumstances, the cost to the SRA of administering applications for authority to withdraw surplus funds from client account?
Imposing a specific obligation to return surplus client account balances within a reasonable time
Some solicitors do not account to their clients for residual client account balances promptly. The longer the delay, the harder it is likely to be to reunite clients with their money.
The SAR do not specify a time limit within which a solicitor must account to a client for the balance of funds held for that client at the end of a transaction. This raises two concerns:
- the opportunist sweeping-up of old balances for the solicitor's own use when times are hard; and
- the conscious engineering of residual balances that can be swept up at a later date.
The imposition of a specific requirement that solicitors return residual client account balances within a reasonable time following completion of a matter, or following receipt of additional amounts after the principal accounting, may help to reduce the occurrence of surplus client money being retained by solicitors.
The normal approach of the SAR would be to state in the rule that "within a reasonable time" would, in normal circumstances, mean within a period specified in the rule.
Do you support the proposal to impose a specific obligation to return residual client account balances within a reasonable time of the conclusion of a matter?
Do you anticipate any practical difficulties in complying with a specific rule to return residual client account balances within a reasonable time of the conclusion of a matter?
Do you feel that the proposed new rule should give greater precision to the concept of "within a reasonable time" by specifying a period of time which would apply "in normal circumstances"? Assuming that the rule specifies a period of time, please state, with reasons, what period of time you think would be appropriate.