A recent Solicitors Disciplinary Tribunal decision highlights the dangers of firms accidentally misusing their client account.
Using client account as a banking facility is a 'serious departure' from required standards
Earlier this year Mandeep Dhariwal was fined £40,000 and ordered to pay SRA costs of £20,250 for allowing his firm to act as an escrow agent. Despite no suggestion of dishonesty the Solicitors Disciplinary Tribunal commented that it was Dhariwal's conduct in letting the client account be used as a banking facility which represented a 'serious departure' from the standards expected of him.
There is undoubtedly a lack of clarity and awareness amongst some in the profession on this issue – Dhariwal believed the investment schemes in question were genuine. However, he accepted that with hindsight he should have considered that there was a risk he was breaking solicitor rules.
The SRA has provided a warning notice about the improper use of a client account as a banking facility This states the key issues and offers guidance to the current SRA position.
Potential risks when acting as an escrow agent:
- Providing banking facilities through a client account is prohibited. The SRA states that a firm should only receive funds into client account in relation to an underlying transaction that you or your firm is advising on.
- There must be a reasonable connection between the underlying legal transaction and the payments. This will be dependent on the facts of each case. You should only hold funds where necessary for the purpose of carrying out your client's instructions in connection with an underlying legal transaction or a service forming part of your normal regulated activities. You should ask why the client cannot make the payment themselves. If the client does not have a bank account in the UK, this considerably increases the risks. You should be prepared to justify any decision to hold or move client money.
- Significant aggravating factors include the risks of insolvency and money laundering. Following the case of Simms SDT 8686/2002 “A solicitor who involves himself in transactions which he knows or suspects or should have known or suspected could involve illegality or impropriety or who gives such transactions credibility cannot but appreciate that his behaviour will be perceived as affecting his integrity and trustworthiness and so affect the reputation of the Profession.”
Minimise your risk
If you are in doubt about holding funds in escrow or the investment scheme we recommend you consult with the SRA's ethics help line or alternatively please contact your Lockton Account Executive / Lockton claims department.
How Lockton can help
At Lockton we want to protect your firm's reputation and control any additional risks your firm may face. Regulatory breaches and or subsequent claims arising from misuse of the client account or participation in questionable investment schemes will mean facing in-depth questioning by insurers and ultimately an increase in premiums, if insurers are unable to get the comfort from your conduct in these past activities.