Warning notice

Money missing from client account

 

Issued on 12 June 2015

Status

Whilst this document does not form part of the SRA Handbook, we may have regard to it when exercising our regulatory functions.

Who is this notice relevant to?

This warning notice is aimed at all those we regulate but is particularly relevant to you if you are a manager of a firm or a firm's COFA or COLP.

Any deficiency on client account exposes clients and others to a risk of financial loss and damage to public confidence. Missing money must be replaced with extreme urgency.

The Solicitors Regulation Authority’s Principles

You have a duty to ensure that client money is safe. Operating a deficient client account may cause you to breach one or more of the SRA Principles, including:

  • Principle 2 - acting with integrity
  • Principle 5 - acting in the best interests of each client;
  • Principle 6 - behaving in a way that maintains the trust the public places in you and in the provision of legal services;
  • Principle 10 - protecting client money and assets.

The Solicitors Regulation Authority’s mandatory outcomes

You should also have regard to the following mandatory Outcomes:

  • O (1.1) You treat your clients fairly;
  • O (1.2) You provide services to your clients in a manner which protects their interests in their matter, subject to the proper administration of justice;
  • O (1.12) Clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them;
  • O (1.16) You inform current clients if you discover any act or omission which could give rise to a claim by them against you.
  • O (4.2) Any individual who is advising a client makes that client aware of all information material to that retainer of which the individual has personal knowledge.

SRA Accounts Rules 2011

It is your duty to remedy breaches of the SRA Accounts Rules 2011. Specifically Rule 7 states:

  • 7.1 Any breach of the rules must be remedied promptly upon discovery. This includes the replacement of any money improperly withheld or withdrawn from a client account.
  • 7.2 In a private practice, the duty to remedy breaches rests not only on the person causing the breach, but also on all the principals in the firm. This duty extends to replacing missing client money from the principals' own resources, even if the money has been misappropriated by an employee or another principal, and whether or not a claim is subsequently made on the firm's insurance or the Compensation Fund.

The implications of missing money

It is important that all managers and employees of a firm fully understand the implications of money being missing from client account, including:

  • There is a clear duty in the SRA Accounts Rules to replace a deficiency in a client account.
  • In the general law, trustees in breach of trust also have a duty to replace a deficiency.
  • In any event, operating a deficient client account is very likely to involve immediate and continuing breaches of trust – by paying some clients their full entitlement, the amount left for other clients reduces.
  • Ultimately, a deficient trust account is likely to be distributed pro rata.
  • You may well breach your duty to act in the best interests of clients if you pay client money into an already deficient account without fully informed consent - no properly advised client would pay funds into a deficient account with the risk of only receiving a proportion back. Failing to inform clients exposes them to a risk of loss (see O 4.2).
  • Until missing money is replaced, you should not take costs from the client account – you cannot “properly” require payment of your fees from money held in a client account in such circumstances and so rules 17.2 and 17.3 of the SRA Accounts Rules 2011 will not apply. Nor is it in the best interests of clients for you to take costs from client account when there is insufficient in the account for you to pay them in full.
  • If you or your insurers do not replace the money promptly, you are at serious risk of intervention by the SRA. Intervention may be necessary in any event if there is reason to suspect dishonesty or other grounds for intervention arise.
  • Since it is unlikely that a deficient client account can be operated without further breach of trust, you may well need to apply to the court for directions as to how to distribute the remaining funds.
  • Offences under the Fraud Act 2006 may be committed once you are on notice that money is missing if you do not act properly and honestly.

Complying with the Principles

It is critical that to protect your clients, you do not operate a deficient client account and that you keep client money safe.

If you are the firm's COFA, you must take all reasonable steps to ensure compliance with the SRA Accounts Rules 2011 and record any failure to comply. You also have an obligation to report material breaches to the SRA as soon as reasonably practicable.

If you are a manager, the COFA is not a substitute for you and your firm's responsibilities and obligations. Systems and actions that should aid compliance include:

  • having appropriate accounting procedures for your business;
  • having clear reporting lines to encourage appropriate reporting by all members of staff;
  • ensuring that your systems only allow appropriate individuals to authorise payments from client account;
  • immediately investigating and taking action against any member of staff who may have acted dishonestly or committed any financial impropriety whether in relation to client account or not;
  • taking regular steps to monitor, review and manage risks.

Behaviours of concern that you should be alert to in your firm include:

  • failure to deliver bills or provide written notification of costs;
  • any suggestions of overcharging;
  • borrowing from clients in the capacity of trustee or attorney, which is unsecured;
  • borrowing that remains outstanding, in breach of any agreement to pay;
  • delay or failure to account for monies due;
  • any accumulation or pattern of one or more of the above.

If you identify that money is missing

If you identify that money is missing, you have a duty to take steps to ensure it is replaced, in full, immediately.

If you are a manager of the firm, you have a duty to replace missing client money from your own resources. It may be necessary for you to obtain a loan to do this. It is irrelevant that fault may not lie with you personally.

You may be able to make a claim on your professional indemnity insurance. The obligation to remedy a breach of the SRA Accounts Rules 2011 is treated as civil liability for the purposes of clause 1 of the Minimum Terms and Conditions.

Operating the client account when it is deficient may make you liable for breach of trust and failure to act in the best interests of your clients. If you cannot replace the missing money and your insurers do not do so very promptly, you may be unable lawfully to operate the account. You will have to consider the position as a matter of trust law including whether you need to apply to court for directions as trustee.

Enforcement action

Whilst we are committed to working constructively with you, we will take enforcement action if missing money is not replaced. Failure to replace missing money will usually lead to an intervention. It should not be assumed that replacing the money means that an intervention is not necessary since the conduct giving rise to the shortage may evidence dishonesty or other breaches giving rise to a need to intervene to protect clients and the public.

Further assistance

If you require further assistance with understanding your obligations in relation to anything please contact the Professional Ethics Guidance Team.