Using the client account as a banking facility and the rule on underlying transactions
Rule 14.5 of the SRA Accounts Rules 2011 states:
“You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”
It is difficult to understand the precise scope of Rule 14.5. It is unclear whether the two sentences are setting out two different rules. There is no definition of “banking facility” and there has already been one High Court dispute over the meaning of “underlying transaction” (see Patel v SRA  EWHC 3373 (Admin)).
That makes it very difficult for a solicitor to decide what payments can be made and for a COFA to decide whether there has been a material breach.
The Guidance notes to the SRA Accounts Rules do not help. Those guidance notes simply warn the reader that a solicitor could face disciplinary proceedings, commit a money laundering offence or lose the firm’s exemption under the Financial Services and Markets Act 2000 (which permits firms to carry out FCA regulated activities such as litigation for insured persons) if the rule is breached.
Fortunately, some guidance can be obtained from the decisions of the Solicitors Disciplinary Tribunal and the SDT appeal cases which have reached the High Court.
Using the client account as a banking facility
In SRA v Wood & Burdett (SDT 8669/2002), according to the SDT findings Mr Wood exempted his client account from the provisions of the Cheques Act so that his firm could present any cheque to their bank for payment regardless of the payee. He then gave clients cash in exchange for their cheques. That gave clients cleared funds straight away and it encouraged clients to refer work to the firm. The Tribunal said that was a banking facility, which was not a proper part of a solicitors business, and then they struck Mr Wood off the Roll.
Further examples of banking facilities are:
- Receiving funds from English buyers of cars and releasing the funds to the German seller when the cars were delivered to the transport agent (SDT case no 7111-2011)
- Permitting a Football Club to use the client account as a trading account after a winding up petition had frozen the Club’s bank account (Fuglers v SRA  EWHC 179 Admin)
- Permitting a relative’s company to pay cheques into client account when the company had difficulties obtaining credit facilities (SDT case no 10975-2012)
The second limb of Rule 14.5, relating to underlying transactions, has been treated by the High Court as a separate rule (see Patel v SRA  EWHC 3373 Admin). It is a more dangerous rule because it applies to every client account movement and it is easy to overlook its effect. Two cases provide helpful comments on the effect of the rule.
In Patel v SRA Mr Justice Cranston said that the import of Rule 14.5 is that all movements on client account must be in respect of instructions relating to (1) an underlying transaction which is part of the accepted professional services of solicitors or (2) a service forming part of the normal regulated activities of solicitors.
In SRA v Fuglers the Tribunal expected there to be a nexus between the client account movement and the legal work such that the client account receipt, transfer or payment is ancillary to the legal work.
The importance of that nexus, and the need for every payment out of client account to be ancillary to the legal work, cannot be overstated. Money sent to the firm for a property purchase cannot be used to pay school fees if the purchase is aborted. Settlement monies received at the end of a litigation case cannot be used to pay a credit card debt.
Combining those two cases, the golden rule is: Do not sign off a client account voucher unless (1) the receipt, transfer or payment relates to underlying work carried out by the firm (2) the work is legal work of a type normally carried out by solicitors and (3) the receipt, transfer or payment is ancillary to that legal work.
If you don’t follow that rule, you risk disciplinary proceedings, or worse, for a breach. It will then be too late to say you didn’t know. After all, the guidance note did warn you.
t: 0207 7227 7232