Case study: When is a breach 'material' or 'non-material'?

May 2013

A common dilemma facing COLPs and COFAS is whether or not a breach is material and therefore needs to be reported to the SRA.

These scenarios are examples of reports we have recently received. We outline the factors that COLPs and COFAs should take into consideration in reaching a decision on whether the breach is material or non-material.

Scenario 1

Details of the report

The firm's COLP made a report to the SRA that a fee earner had failed to fulfil an undertaking within the specified time. The details are as follows: a solicitor in the conveyancing team had given an undertaking to forward certain documentation to the solicitors for the buyer within seven days of receipt of the documentation. The solicitor was then out of the office for a fortnight on holiday and the documentation was received during their absence. This meant that the documentation was not forwarded until 12 days after actual receipt.

Is it a breach?

As the undertaking was not fulfilled within the required timescale, namely seven days of receipt, this amounts to a failure to comply with Outcome 11.2 of the Code of Conduct.

This should be recorded by the COLP.

Is the breach material?

There are a number of factors which the COLP will wish to consider in deciding if the breach is material:

  • What were the consequences of not fulfilling the undertaking within the agreed timescales?
  • Was there any detriment to the client?
  • Was the conveyancing transaction put at risk?
  • What impact did the delay have on the client?
  • Did the client or a third party incur additional costs as a result of the delay?
  • Was there any negative impact on the buyer as a result of the delay?

In this case, there was no detriment to the client or any third party as a consequence of the delay in forwarding the documentation and the particular circumstances meant that the breach was not material.

However, if there had been an adverse impact on the client or the other buyer as a result of the delay, the breach would have been material.

Additional issues to consider

One of the purposes of recording all breaches is to enable the COLP and COFA to monitor overall compliance and to assess the effectiveness of the firm's systems.

In these circumstances, the COLP may wish to remind all staff of the importance of fulfilling undertakings. They may also wish to consider whether there need to be improvements in the systems for recording undertakings, either on individual files or a central register. They might also wish to reflect on what arrangements need to be put in place to ensure the continuation of matters and compliance with obligations during the absence of a fee earner.

Recording is also important because a pattern of non-material breaches may lead to the issue becoming material, which would require a report to be made. For example, if there were repeated instances of a delay in fulfilling undertakings within agreed times, irrespective of whether or not there were consequences, this may amount to a material breach.

Scenario 2

Details of the reports

The firm's COFA reported that their bank had incorrectly debited £28.69 from their client account, instead of the office account, to pay for the firm's telephone messaging service. The error was identified the following day and rectified immediately.

Is it a breach?

Client money may only be withdrawn from client account in accordance with rule 20.1 of the SRA Accounts Rules 2011, for example when it is properly required to make payment on behalf of a client. The use of client money to pay the firm's telephone messaging service was a breach of rule 20.1 and so should be recorded as such by the COFA.

Is the breach material?

Although client money was incorrectly used, this arose as a result of a bank error. The firm's accounting systems meant that it was identified the next day and immediately rectified by them. The overall impact meant that it was a non-material breach which did not need reporting to the SRA.

Additional issues to consider

It appears that the systems for ensuring compliance with the rules were operating effectively, and the breach arose as a result of a bank error. So the COLF may wish to consider contacting the bank to flag the issue and reminding them of the requirements relating to the operation of client and office accounts.

Scenario 3

Details of the report

The firm's COFA made a report of a number of instances of non-compliance with rule 20 of the SRA Accounts Rules 2011. Payments which should have been made from the office account were incorrectly made out of client account, as follows:

Date of payment Amount of payment Date identified Date rectified
30 January £22 5 February 8 February
5 February £6 14 February 15 February
18 February £76 20 February 22 February
11 March £105 14 March 18 March
28 March £22 3 April 4 April
8 April £18 11 April 16 April

Four of the six payments were bank charges (e.g. for international transfers), but two related to payments requested by the fee earner for disbursements where funds had not been received from the client for those.

Is it a breach?

Each client's money must only be used for that client's matters. This was not the case with the six payments. The use of the client account money was not in accordance with rule 20.1 of the SRA Accounts Rules 2011 and was a breach that should be recorded.

Is the breach material?

The first issue to consider is the risk to client's monies. Individually, none of the payments was a significant amount but in each case client money was being used inappropriately and there was a pattern of breaches over an extended period of time.

The firm's accounting systems meant that there was a delay in identifying the breaches and in two instances, a failure in the firm's internal controls allowed the payments to be made incorrectly from the client account. Once identified, the breach was not rectified immediately in any of the cases despite the requirement to repay any money improperly withdrawn from client account promptly, as soon as it is discovered.

The failings in the accounting systems and the pattern of breaches, although small amounts, meant that the breach was material.

Additional issues to consider

The COFA will need to review their accounting systems and records, as well as internal controls regarding payments from the client account, to ensure compliance. They will also need to identify the issues with the bank in relation to bank charges needing to be paid from the office account.