Protecting client money

Why this risk matters

  • Around 7,500 law firms hold client money and must comply with our Accounts Rules. These rules are there to keep this money safe.
  • The number of solicitors and firms that fail to protect client money is low. However, it is essential that all firms, regardless of size and make up, have the right systems and controls in place to protect their clients’ money and maintain public trust in the profession.
  • Client money is at risk if:
    • there are few controls on who can access the client account
    • there are limited controls within a firm’s accounting system
    • staff are not trained how to keep money safe from potential threats, such as cyberattacks or other fraudulent behaviour.

Trends

  • Between May 2017 and 2018, there were on average, 94 concerns a month reported to us about the misuse of client money or assets. This year we have seen an increase in the number of these reports. We are now receiving around 104 concerns a month.
  • About a third of the concerns involve fraud relating to property, insurance, probate, public funding or tax.
  • Over one third of the concerns about money being misappropriated relate to conveyancing, probate and immigration work.
  • Most of these concerns proved to be about poor accounting systems and lack of communication rather than dishonesty.

What firms can do

  • Good accounting systems and checks are crucial to protecting client money from being misused. Firms must:
    • vet, train and supervise staff, making sure everyone knows their responsibilities to keep client money safe
    • have systems for good account management and audit
    • reconcile accounts that are signed off by the compliance officer for finance and administration at least every five weeks
    • never allow the client account to be used as a banking facility
    • have a business succession plan and contingency plans for accounting staff
    • have strong IT systems with good backups
    • engage with us about any concerns.
  • All solicitors are responsible for keeping client money safe – not just the compliance officers. If client money is taken by a third party, such as through a cyberattack or a staff member, the firm must report this to us promptly. They need to do this even if they have already replaced the money. They may also need to notify Action Fraud, their professional indemnity insurer, the Information Commissioner’s Office and take appropriate IT advice.
  • Firms should carry out proper due diligence on potential employees. There have been two recent cases of fraudsters being employed by small firms and stealing client money. We have also seen cases where firms have employed staff that have a section 43 order against them. This check should also be part of firm’s recruitment processes.

What we are doing

  • We have updated our warning to firms about the improper use of a client account as a banking facility.
  • We protect the public by investigating reports and acting where needed, and we have powers to award compensation for money lost by a firm. We usually act against firms when they did not:
    • have suitable systems to protect against crime
    • replace lost money promptly
    • report matters promptly.
  • Solicitors who knowingly misuse their clients’ money are likely to be referred to the Solicitors Disciplinary Tribunal and are at risk of serious sanction, such as being struck off the roll.
  • We help the public if a solicitor, or anyone working in a firm, is dishonest or incompetent. We do this by:
    • requiring that all firms have professional indemnity insurance (PII)
    • managing the Compensation Fund. People can make a claim on the Fund if they have suffered loss because of a solicitor’s dishonesty or failure to account for their money. It is a discretionary fund and we will decide whether to make a grant on a case by case basis.
  • We have consulted on changes to the PII requirements and Compensation Fund to make sure people get the right level of protection. We are currently analysing the responses we have received.
  • The reforms to our Accounts Rules will enhance firms’ ability to keep client money safe, as the reforms:
    • are clear about the standards we expect when solicitors handle client money
    • allow firms that only hold fees and disbursements to choose whether they want to use a client account
    • make it easier to use alternatives to holding client money, by introducing clear safeguards around third-party-managed accounts
    • focus our resources on serious breaches and better protect the public by reducing the number of accountants’ reports being qualified unnecessarily.
  • The new Accounts Rules will be introduced alongside the rest of our Handbook reforms, which is planned for April 2019.
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