Dealing with money when we intervene

Introduction

Purpose and status of this guidance

This document contains guidance on how we deal with money held by a law firm which we intervene into. We have the power to intervene into a law firm in some circumstances. One of the consequences of an intervention, is that all of the firm's money (both client and practice money) becomes legally vested in us and we hold it on trust for the people it belongs to.1 This is a type of trust called a 'statutory trust.' The people that the money belongs to are 'beneficiaries' of the trust.

In 2006 we took a case to court to clarify our duties as a trustee.2 The court provided detailed guidance on our duties as a trustee. In 2007, an amendment to the Solicitors Act 19743 gave us the power to write rules to govern how we deal with statutory trust money. Our rules reflect the guidance given by the court and are based on a proportionate and reasonable approach to dealing with the money we hold. Our current rules are the Intervention Powers (Statutory Trust) Rules 2011.

This guidance explains how we establish what money we are holding in a statutory trust, who it belongs to, and how we try to return the money to its owner.

This guidance should be read in the context of our rules, decision making at the SRA and other related guidance. It is a living document and will be reviewed and updated as appropriate. It reflects our approach to our regulatory role and any departure must be capable of justification on the individual facts of the case.

General points about a statutory trust

Statutory trusts vary in size and complexity. Some can contain millions of pounds from numerous bank accounts which relate to hundreds of beneficiaries. Others may contain a small amount of money from one bank account due to a handful of beneficiaries. The accounting records taken from intervened firms can also vary in quality, and there may be none at all.

These factors affect the amount of work we need to do, to establish who should be paid the money in a statutory trust and, therefore, how long it will take to pay people. However, we do try to follow the same processes in each case and a number of general points apply to most, if not all, cases:

  • We will gather and consider all relevant information to try to establish whose money we are holding.
  • We will consider all claims for money held in a statutory trust. We expect people making a claim to provide sufficient evidence to support their claim and to be open and frank in their dealings with us.
  • We assume that money from the firm's client account belongs to the firm's clients unless there is evidence to the contrary. For example, costs that have been properly billed but not transferred.
  • We assume that money from the firm's office account belongs to the firm unless there is evidence to the contrary. This could include evidence that money has been taken inappropriately from a client account.
  • We always act in a reasonable and proportionate way when dealing with a statutory trust. This means that we will only take steps which we think are proportionate to the amount of money we hold and reasonable in the circumstances.
  • We may incur costs in dealing with a statutory trust. For example, instructing an external agent to prepare the reconciliation in a complex matter. The intervened solicitor is liable for these costs.
  • We do not usually disclose our payment reports given the amount of people they cover and the confidential information that they contain. However, we may disclose reports on single balances where two or more parties are involved and they dispute who the actual beneficiary is. We may also take into account any comments from the parties in making a decision on the payments to be made.

Dealing with the accounting records (accounts)

In a well run firm, the accounts will show the money that belongs to each client and for which matters. The total of these amounts, or 'balances', should match the total amount of client money held by the firm. Firms are meant to confirm the accuracy of their accounts by regularly checking their balances. This is known as a 'reconciliation'. However, in intervened firms the accounts are often out of date or inaccurate. Our first step, therefore, is to work on the accounts to see if we can reach a position where the balances match the money held (i.e. where the accounts are reconciled).

The approach we take depends on the state of the firm's accounts and the amount of money held.

Where there are good accounts

If the intervened firm has good accounts, we may be able to rely on them. We still test the accuracy of the accounts by checking a sample of balances to make sure that they are correct. If the sample confirms that the accounts are reliable, then we may only need to update them to show any payments and receipts since the firm's last reconciliation. Where we can do this, the resulting list of balances is called a 'reconciled list'.

However, as most interventions involve firms with poor accounts, this is not common and we need a different approach.

Where there are poor accounts

If the intervened firm has poor accounts, we decide whether it is reasonable and proportionate to try to reconcile them. To do this, we assess the amount of information available, the reliability of it and the amount of work needed. Each case is different, but these are some of the factors that we consider in making the decision whether to attempt to prepare a reconciled list:

  • The state of existing accounting records. When the last reconciliation was carried out by the intervened firm. If a reconciliation has been carried out within the previous 12 months, or the firm has only recently started trading, then the amount of work we need to do to prepare a reconciled list may be reasonable and proportionate. This will depend on how reliable the last reconciliation is and we may check a sample of balances to confirm this. If the reconciliation was carried out by external accountants, then it is more likely to be reliable. However, if there has been no recent reconciliation then there is no starting point.

    If the firm has reliable records of its financial transactions (such as chits, ledgers, chequebook stubs, notes on bank statements or notes on the files). This can be useful information to work with. However, if there are no such records, any reconciliation will be much more difficult.

  • The number of relevant transactions. If there have been a low number of payments and receipts, then there is likely to be less work needed to attempt the reconciled list. Conversely, a large number of transactions is likely to mean that substantial work is needed to attempt the reconciliation.
  • The amount of money involved. The more money there is in the statutory trust, the more likely it is to be proportionate to try to prepare a reconciled list.
  • Third party evidence. If information is available from third parties, then there is a better prospect of a reconciliation. Third parties may include the Legal Aid Agency, where the firm dealt with legal aid cases, or clients.

If we decide that it is not reasonable and proportionate to try to prepare a reconciled list, or we cannot reconcile the accounts, we will create a 'best list'.

Where there are no accounts

If we have no accounts following an intervention, either because the records have been destroyed or because the firm never kept any, a reconciliation will not be possible. Again, we will create a 'best list'.

Best list

If we are unable to reconcile the accounts, we will create the 'best list' of balances we can from the information available. We may use a number of different sources of information to create a best list, such as:

  • Any attempted reconciliation by us.
  • Claims already made on the statutory trust.4 Any such claims will be investigated and, if proven, will be added to the best list. Any proven claims will not be paid until the best list has been established.
  • Claims made on the Compensation Fund. All claims will be considered in producing the best list, whether the Compensation Fund has made a payment or not. If the evidence shows that an amount of money was in the client account at the date of the intervention, then that amount will be added to the best list.

If we have used any attempted reconciliation to create the best list, we will check to see how reliable that list is. This is usually done by comparing a sample of best list balances against the information in the related client files to see if they match. The sample size will vary depending on the nature of the statutory trust but would typically include the highest 10 or so balances and a selection of 5-10% of the others. The total value of the sample balances will be a significant proportion of the statutory trust (often in excess of 50%) and should therefore confirm the reliability of the best list. As highlighted in the sections below, we are able to make certain assumptions when dealing with a reliable best list that we cannot make if the best list is not reliable.

Does the list of balances match the money held?

Once we have created either a reconciled list or a best list, we then compare the total of the balances on the list to the client money recovered from the intervened firm. There are three possible outcomes:

  • Intact - Where the total of the balances matches the money held we refer to it as 'intact'. In this case, we can move on to the next stage.
  • Surplus - Where we hold more money than the total of the balances, we refer to it as a 'surplus'. Although this is uncommon, it does happen occasionally. We treat the surplus as a balance due to an unknown person. If no-one comes forward to claim it, and no further information comes to light, it will be treated as a 'residual balance'.
  • Deficit - Where we hold less money than the total of the balances we refer to it as a 'deficit'. Where there is a deficit we may be able to make it up from money we hold on behalf of the intervened firm. This can include money in office accounts, money in a client account identified as costs due to the firm, or costs received after the intervention. It may not be possible where the intervened person, or body, is insolvent.

Dealing with small balances

It can take a lot of work to confirm a balance, find the right beneficiary and pay them. For a small balance, the cost of that work can be more than the balance held. For that reason we will usually set a figure below which we will not take active steps to deal with balances. This is known as the 'small balances level'. Although we do not invite claims for these balances we still deal with any claims that come in for them.

Our usual starting point for a small balances level is £250, as this is the approximate cost to us of dealing with an individual balance. However, we then consider other factors to set the appropriate level for a particular statutory trust, such as:

  • Reliability of list - If there is a reconciled list or best list that we consider to be reliable, we can set a lower small balances level because less work will be required to make payments. Conversely, if the best list is unreliable, we will need to do more work to pay people and will set a higher small balances level.
  • Number of small balances- If there are only a few small balances, then we may set a low small balances level. This is because the work involved in dealing with a few such balances is unlikely to be disproportionate overall. Conversely, if there are a lot of small balances, then we may set a higher small balances level as far more work will be needed which is likely to be disproportionate overall.
  • The nature of the clients of the firm - If the intervened firm mostly carried out work for vulnerable individuals, such as housing or welfare matters, then we are likely to set a low small balances level, as £250 may be a substantial sum to those clients. Conversely, if the intervened firm mostly carried out commercial work for corporate clients, then a higher small balances level may be appropriate.

Example 1

We are able to create a reconciled list for the ABC & Co Statutory Trust containing £500,000. The money we hold matches the reconciled list, so the trust is intact. It has 250 balances of which only 30 are under £250.

As there is a reconciled list and few small balances, we set a small balances level of £20 as there will not be much work involved in dealing with them and therefore the costs incurred will not be disproportionate.

Example 2

We are only able to create a best list for the DEF & Co Statutory Trust containing £350,000, which does not prove reliable. It contains 450 balances and suggests a total deficit of £20,000. 150 balances are under £250 and a further 100 balances are under £500.

As the best list is not reliable and there are a lot of small balances, we set a small balances level of £500. A lot of work will be needed to deal with each balance due to the unreliability of the best list. Our costs and the time spent dealing with the small balances would be disproportionate.

Inviting claims

Our next step is to invite claims from beneficiaries who have not already made a claim. We contact the beneficiaries to ask them to complete a claim form and provide identification. The beneficiaries may be:

  • The client - The client and their contact details can usually be found in the firm's records or the client files.
  • Third party - A third party may be a beneficiary. For example, HMRC, the Land Registry or an estate agent in a conveyancing matter, or a barrister or an expert on a litigation matter.
  •  Compensation Fund – Due to the time it generally takes to deal with the statutory trust, most clients or third parties with money held by the intervened firm will normally have made a claim on the Compensation Fund. In such cases, the Fund becomes the beneficiary in place of the person it has paid.

If we can identify the beneficiary but do not know where they are, we may instruct tracing agents to try to find them. We may not know where they are because the firm's records do not contain any contact details or because the contact details are no longer correct. We will consider these factors when deciding whether to try to locate such beneficiaries:

  • Amount of money - The higher the balance the more proportionate it is to try to locate the beneficiary.
  • Information available - If we have useful information (for example a full name, a previous address and date of birth) then it is likely to be appropriate to try to locate the beneficiary as the chances of success are higher. But if we have very little information, (for example only a surname and initial) then it is not likely to be appropriate to try to locate them.
  • Personal circumstances - We will take additional steps to communicate with and protect the interests of vulnerable clients if we are aware of their circumstances.

Example 3

We establish that £5,000 belongs to Mr G. We send a letter inviting a claim to Mr G at the address we find in the client file, but the letter is returned and marked ‘addressee no longer at this address’. A basic online tracing search does not reveal Mr G’s current address. The file contains Mr G’s full name, date of birth and another previous address.

Given the significant amount of money involved and the information available about Mr G, we decide that it is proportionate to instruct an enquiry agent to try to trace Mr G. The agent makes extensive enquiries and locates Mr G’s current address at a cost of £300.

Example 4

We establish that £250 belongs to Mrs H. The file relating to Mrs H only contains an email address and telephone number, both of which are no longer in use. There is no other useful information in the file and Mrs H has a very common surname.

Given the amount of money involved and the lack of information available about Mrs H, we decide that it is not proportionate to try to trace her.

Establishing who each balance belongs to

Once we have compared the reconciled or best list with the balances recovered and invited claims, we will next establish who each balance belongs to, so that we can make payments. We need to do this as a balance may, for example, have a number of potential claimants to it, such as the seller, mortgage provider or estate agent in a conveyancing transaction.

In many cases it will be obvious who should be paid the balance and payment can be made quickly. An example is where a client paid money to the intervened firm shortly before the intervention, to hold pending a property purchase, but no work was done. In this case it is obvious that the balance should be paid to the client.

In other cases, it may not be clear who should be paid the balance and further investigations may be required.

If two or more parties claim the same balance, we will consider the evidence and make a recommendation for payment in a report. The report will disclosed to the parties for comment before a formal decision is made. Very occasionally, it is not possible for us to decide who should be paid. If the parties cannot agree, we will put aside the balance for a period of time to enable an agreement to be reached, including court proceedings if necessary.

Example 5

We establish that a balance of £20,000 relates to a property sale that completed two years ago. It is not clear from the file why this money was held by the intervened firm, so we contact both the seller and the buyer to find out. We learn that the parties have been in dispute over the £20,000 since completion of the sale. Both are legally represented and court proceedings are imminent.

Given that the parties are in dispute and are heading towards litigation, we decide to hold the balance until the dispute is resolved. Six months later, the parties agree that they are each entitled to half of the money. We therefore make a payment of £10,000 to the seller and £10,000 to the buyer.

In some cases we may establish that a balance, or part of a balance belongs to the intervened firm. For example, there may be unpaid costs or disbursements which the firm has not taken from the money it was holding for the client. We treat this money as office money.

Deciding to pay money

We prepare a report, known as a 'payment report', prior to making a formal decision to pay money out of the statutory trust. Payment reports can cover the statutory trust as a whole, in which case the decision maker is asked to approve a “payment scheme”, or to a specific balance, in which case the decision will relate to a specific payment.

A payment report (both for a specific payment or a payment scheme) will contain the following information:

  • relevant background to the intervention and intervened firm
  • the state of the accounts and whether a reconciled list or best list was possible
  • whether the statutory trust is intact, has a surplus,or deficit
  • the extent of and conclusions from any sample checking.

A payment report for a payment scheme will also contain the following information:

  • the proposed small balances level and the reasons for it
  • recommendations for payments to the various classes of beneficiaries
  • recommendations for dealing with any office money.

A payment report for a specific balance will contain a recommendation for the payment of that balance.

Payment scheme

If a payment scheme is approved, it allows us to pay all, or many individual beneficiaries where certain circumstances are met. Some examples of payment schemes are:

  • Reliable list - If there is a reconciled list, or reliable best list, then certain assumptions can be made. For example, it could be assumed that all balances under a certain amount, say £2,500, belong to the clients and can be paid without any further work.

    Similarly, we may waive the requirement that all beneficiaries complete a claim form and provide appropriate identification before a payment is made. For example, claim forms and identification could be required for balances over a certain amount, say £1,000, but only identification is needed for other balances, say between £500 and £1,000, and nothing is required for balances below £500.

  • Percentage payment - If the statutory trust has a deficit, then it is likely to be appropriate to pay a fixed percentage of each balance. This ensures that every beneficiary is treated equally. The payment scheme may recommend that balances which will not be paid (such as unclaimed small balances or where the beneficiary cannot be located), are used to make up the shortfall in the individual payments, so that each beneficiary will receive a higher payment.

  • Difficult balances - We may proceed with the majority of the payments from the statutory trust even if there are difficult balances that require further investigation, so that the other payments are not delayed. In this case all difficult balances will be dealt with later.

Specific payments

We may also decide to pay specific balances in addition to, or instead of a whole payment scheme. Examples of when we may do this include:

  • Deposit account - If the intervened firm held a deposit account for a particular matter, then it is likely to be appropriate to deal with the money from that account on its own. This is because we can be sure that the whole of the money in that account is for that matter and therefore paying it out would not prejudice any other beneficiaries.
  • Difficult balance - It may be appropriate to deal with a difficult balance, such as one involving several parties, on its own after the payment scheme has been approved. This would make it easier for us to disclose the payment report to the parties and would allow the decision maker to consider the specific facts of the balance
  • Interim payment - We can make an interim payment before we have completed the steps detailed above for the whole statutory trust if we are satisfied that the payment will not prejudice any other beneficiary. We will only make interim payments where there is a particular urgency and where not making the payment would cause prejudice.

Residual balances

Where we are unable to pay a balance, then under Rule 9.2 we can treat the balance as a 'residual' fund and pay it to the Compensation Fund. We commonly do this for unclaimed small balances, where we cannot establish who to pay a balance to, where we cannot locate the beneficiary, or if there is a surplus.

Rule 9.2 states that if any such residual funds are transferred to the Compensation Fund, any claims for those residual balances are extinguished. However, if a beneficiary subsequently comes forward we will consider in the circumstances whether to retrieve the money from the Fund to make a payment.

Office money

If the statutory trust contains money that wholly belongs to the intervened firm, we will use it towards any deficit in the statutory trust. If there is no deficit, or there is an insolvency preventing that, we will pay it towards the outstanding costs of the intervention, or any outstanding Compensation Fund grants. If there is still any such money after that, we will pay it to the intervened firm.

Notes

1. Paragraph 6 of Schedule 1 to the Solicitors Act 1974 for recognised bodies/sole practitioners and Paragraph 3 of Schedule 14 to the Legal Services Act 2007 for licensed bodies.

2. Re Ahmed [2006] EWHC 480.

3. The Legal Services Act 2007 inserted a new paragraph 6A into Schedule 1 of the Solicitors Act 1974.

4. Immediately after the intervention, we notify clients what has happened and tell them they can make a claim if they think the firm is holding money due to them. We therefore may already have received a number of potential claims before we reach this stage.