Hidden extras

The distinction between disbursements and fees has become blurred in respect of many solicitor's firms dealing with disbursements such as telegraphic transfer (TT) fees. This can lead to unexpected and unfortunate results.

Common practice

Very often solicitors arranging TTs will charge a sum which is a composite figure reflecting the actual charge made by the firm's bank (say £20) to which is added, say, £10 '“ making a total charge to the client of £30 plus VAT. The additional £10 is added to reflect the time spent by the fee-earner, secretary and accounts staff in processing the transfer and any additional overheads incurred by the firm such as payments for an in-house TT terminal.

This practice goes on in virtually every solicitors' firm throughout England and Wales. Yet it is in breach of the professional rules and can lead to a hostile reception in the SDT.

This comes about because rule 2.03(1) of the Solicitors Code of Conduct provides that 'you must give your client the best information possible about the likely overall cost of a matter both at the outset and, when appropriate, as the matter progresses'. In particular you must 'advise the client of the basis and terms of your charges' (rule 2.03(1)(a)) and advise them of 'likely payments which you or your clients may need to make to others' (rule 2.03(1)(c)).

Uninformed

Informing the client about the nature of the charge lies at the heart of this issue. This can lead to problems because either solicitors do not inform their clients at the outset of the retainer that there will be a charge for making payments via TT at all, or the firm informs them of the charge but do not differentiate between the fees element and the disbursement element (as defined in the SAR).

The SRA regards such practices as a serious breach of the code under rule 2 (see above) and also of the core duties of acting with integrity (rule 1.02), acting in the best interests of each client (rule 1.04) and providing a good standard of service to your clients (rule 1.05).

No changes have been made to these core duties or to rule 2 by the 2009 Code of Conduct, which should come into force on 31 March 2009.

Reputation and compliance no bar to a fine

In two recent cases the SRA successfully prosecuted firms in the tribunal for breaches relating to this issue. In the first case the seven partners were described by the tribunal as having unblemished careers, and were congratulated for taking compliance issues seriously. The tribunal acknowledged that the practice in question was widespread throughout the country. In the other case, the tribunal said the 10 partners charged were found to be members of a reputable, highly distinguished firm, long established and highly thought of, that provided a good service to the community in which it conducted its business.

Yet in each case the partners were fined £1,500 each and £1,000 each respectively. However, that is only the tip of the iceberg of the disruption that accompanied these investigations. The costs awards were £25,000 and £24,000 respectively. Neither the fine nor the costs awards will be covered by the firms' PI policy (although the costs of defending the investigation should be). In addition, for at least two years before the tribunal hearings, extensive management time by the partners will have been devoted to managing the defence of the investigation. In particular in one of the cases it was said on behalf of the partners that: 'It was inevitable that having the disciplinary proceedings unresolved inhibited the firm's business planning and it was particularly unfortunate that the disciplinary hearing took place in the firm's centenary year celebrations.'

A relatively low fine recognised the technicality of the breach and the fact that no client complained, but that was the least of the firm's worries in terms of coping with the outcome of the process.

What to do

In July 2008 the Law Society published a practice note dealing with the issue of TT fees, which can be found on the Law Society's web site. The key is to ensure the retainer letter makes it clear that the TT fee is an expense of the firm and will appear as a disbursement while the firm also charges a fee (which should appear in the profit costs row of bills) for arranging that payment by that method. Alternatively accept the TT fee as an overhead of your business and increase your fees by an appropriate amount, making a virtue of this in your firm's retainer letters by explaining that there are 'no hidden extras such as TT fees etc'.

TT charges are a theme of visits by the SRA at present and we expect a number of tribunal decisions on the issue in the coming months. The primary thrust of the SRA's attack is that this very common practice amounts to gaining a secret profit and misleads clients by dressing up profit costs as a disbursement. Expect local authority searches and other disbursements to receive similar, critical analysis.

What is your firm's practice? If in doubt, seek advice.