A proportionate approach to protecting client money Annette Lovell, Carol Westrop, Sophie Howard

Why firms hold client money To facilitate a legal transaction on which the firm is acting Client expectation A financial advantage? Lack of alternatives?

The Risks An estimated £57bn is laundered through the UK each year In 2013 the Compensation Fund paid out over £17m to 1,233 claimants About 30% of all prosecutions at the SDT involve a breach of the Accounts Rules In 2013 over half of interventions were based on a breach of the Accounts Rules

The context is changing Technology has reduced the need to hold client money Entrants to the market are pioneering new ways of working Challenges from outside the profession

The regulatory response If firms hold client money: keep it safe; but do so proportionately by removing unnecessary burdens or prescription.

Reform of the Accounts Rules Phase 1 Phase 2 Phase 3

Phase 2 proposals Revised criteria for qualification of reports Identifying lower risk firms Suggestions for the scope of phase 3 Consultation now open Please all respond

One example of an increasing risk to firms Breach of Accounts Rule 14.5: use of client account as a bank account Breach of this Rule often puts solicitors at risk of other breaches of the law or Handbook Warning card and guidance on Rule14.5 due to be published shortly

Case Study 1 A solicitor acted for a wealthy, overseas client who owned 3 high-value residential properties in central London. Most of the services consisted of paying utility and other bills for the private properties. The firm also held tenancy deposits. The client initially instructed the solicitor on the preparation of the leases, but this was 10 years ago.

Case Study 2 A firm acted for a property development company on the sale of 4 leasehold flats. When the flats were sold, the client asked the firm to retain the proceeds in the firm’s client account. The client then asked the firm to: –pay a building contractor, architect and council tax in relation to another development site; and –pay £56,000 to a consultant for his services as sales agent.

The consultant asked the firm to pay a car dealership for a new car and the balance to a firm of solicitors as a deposit on a house purchase.