SRA Account Rules & Rule 3.3: Ensuring you are not using your client account as a banking facility

The SRA have flagged banking facilities as one of their more worrying issues within the Accounts Rules. In March 2023, they published a warning notice along with some additional case studies, looking at the improper use of a client account as a banking facility. The very fact that the SRA are regularly publishing guidance on this aspect should prompt law firms to review and consider their own procedures.

Paul Philip, SRA Chief Executive said

“It is really important that firms don’t use the client account as a banking facility – it can open the door to money laundering or help people inappropriately hide away assets.”

Who should be following the SRA Accounts Rules?

We need to take a step back before we look at the detail of the SRA Accounts Rules, and remember who the Rules are applicable to. 

The Rules apply to the managers and the employees of a law firm. In this case, managers means the sole practitioner, a partner in the partnership, a member of the LLP, or a director of the limited company. 

Managers are jointly and severally responsible for compliance with the Rules, so it should be part of their remit to set processes and controls within the firm to ensure adherence. 

And when we are considering which employees are covered by the rules, we cannot simply refer to the client-facing fee earners. It covers every member of staff.

What does rule 3.3 actually say?

“You must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdraws from a client account must be in respect of the delivery by you of regulated services.”

The term regulated services covers the legal engagement that you are performing, but also can include situations where your firm are acting as a trustee or other officeholder, such as a Court of Protection Deputy.

What is the problem?

The Solicitors Disciplinary Tribunal have concluded that the operation of a banking facility for third parties is not part of a law firm’s day to day business. It is irrelevant whether the third-party is actually a client of the firm or not.

Law firms are not regulated as banks but still have professional obligations under anti-money laundering regulations. 

The SRA in the warning notice state that “if provide banking facilities for clients, you are trading on the trust and reputation from your status as a solicitor in doing so” and the negative impact of this of the profession could be significant.

The SRA quite simply state that “providing banking facilities through a client account is objectionable in itself.”

Do you have a connection between the regulated service that your firm is operating and the payments that you are being asked to make or receive?

Rule 3.3 is not trying to make the everyday law firm transactions difficult to undertake. 

It is attempting to set professional parameters for law firms to follow, which will reduce the risk of them falling foul of inscrutable clients, who may have other objectives in moving their funds around. 

The question to always ask before accepting funds or making payments out of client account is whether this transaction is, in reality, part of the service you are engaged to provide.

Convenience

You are likely to want to help your clients through whatever process you are engaged to fulfil. Sometimes you may be asked to make payments from your client account which would simply be convenient for your client.

An example of this could be where your client has funds in client account, and they have promised to loan money to their daughter as a deposit for her first house purchase. You have been asked to undertake the conveyancing for that purchase.

So when your client asks you to transfer cash to his daughters account, this would save him time in transferring the funds himself. It would be convenient for you to complete this transfer, but of course it has nothing to do with the initial client service to the father. You will therefore need to explain why you will not be able to process this transfer.

Do you have long-standing private clients for whom you keep client monies without a specific service transaction being undertaken?

Some of these clients, perhaps are elderly or live abroad, and expect your firm to hold onto an amount of cash for them and possibly make payments on their behalf.

This might have been happening for many years, but as the pace of change in the banking sector increases, many individuals are able to conduct online banking without the need to be in the country or in the actual bank branch. There should be no reason for you to retain these monies.