Integrity above all else
Emma Walker explains why operating ethically and within the regulator’s guidelines means the client cannot always be king
A Solicitors Disciplinary Tribunal (SDT) judgment handed down in July served up a chilling reminder to practitioners not to use their client account as a banking facility. The solicitor who was prosecuted remained under oath for almost six months when he had to retire from giving evidence due to illhealth, before being struck off for breaches including misusing his client account. The SRA recognised that the solicitor was himself a victim, in that his actions were the result of those of others “more wicked than he”. His barrister outlined to the SDT that legal aid cuts meant that, by 2015, he was struggling to keep his firm afloat. He was working alone, with neither solicitor colleagues nor support staff, and suffering from ill-health that affected his judgement. He was, she said, “a perfect target for experienced criminals”, easily manipulated and vulnerable to suggestion, and open to temptation due to his poor finances and health. She explained that while none of that excused what he did, he had put work before everything in life, defined himself by his role as a solicitor and the circumstances in which he would leave the profession were a tragedy. At the time of the hearing, he had no income, savings, or pension and had been made bankrupt. He was living in a mortgaged property with no means of paying for it. Following the hearing he would not be working and faced a difficult retirement. Giving evidence, the solicitor told the SDT that he was ashamed of what had happened. He said that during the adjournment he had reflected on matters and concluded he must have known what was going on and that he had “allowed himself to be deceived at a time when his health was poor.” He said he wished to apologise to the profession. While a rather extreme example, many more subtle scenarios exist that require practitioners to focus their minds, to ensure they do not fall foul of professional rules. When you consider solicitors’ commitment to providing excellent client service, coupled with the time and costs pressures most find themselves under, it is not difficult to envisage a scenario where a solicitor carries out client instructions that are in their client’s interests, but which are also prohibited.
BALANCING THE BOOKS
The principal rule in question is 14.5 of the SRA Accounts Rules 2011: “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.” In broad terms, the rationale for rule 14.5 existing is that:
— operating a banking facility for clients divorced from any legal or other professional work is in itself objectionable;
— there must be a proper connection between the underlying legal transaction or advice and the payments you are asked to make or receive;
— a client may ask you to hold or deal with money in client account to avoid their obligations under insolvency legislation;
— allowing a client account to be used as a banking facility carries with it the additional risk that you may assist money laundering. From 25 November 2019, the relevant provision will appear at 3.3 of the SRA Accounts Rules and is much the same, save that the reference to an underlying transaction is no longer explicit. The prohibition against providing banking facilities may be well-known throughout the profession now, but there was no such express prohibition under the Solicitors Accounts Rules 1998. Given the SDT continues to hear cases and find the rule has been breached, it is clear misunderstandings about its application still abound. WHEN CLIENT ISN’T KING The subject has been on the Solicitors Regulatory Authority’s (SRA) radar for some time and is unlikely to fall away. In December 2014, the SRA published a warning notice, which it updated in August 2018, when it also published case studies designed to provide examples of when payments would and would not infringe the rule. The warning notice instructs that a breach of the rule may also result in a breach of principle 1: (upholding the rule of law and the proper administration of justice); principle 3: (independence); principle 6: (public trust); and, principle 8: (proper governance of your business). These are principles that practitioners must therefore have in mind and successfully balance to stay on the right side of the line. The warning notice distinguishes between “usual and proper payments” from client account (related to an underlying transaction) and other payments in or out. The latter category could include seemingly innocuous payments: to a family member because the client is overseas and does not have a UK bank account, or perhaps a request from an executor to pay a third party directly to save them from having to do so once payment has been made to the estate. The SRA’s guidance is that solicitors should always ask themselves why the client cannot make or receive a payment directly themselves, adding: “the client’s convenience is not a legitimate reason, nor is not having access to a bank account in the UK.” The regulator expects firms to understand and, where necessary, document all relevant risk factors involved in any given transaction. This might include the risk of being taken to have acted for unrepresented parties by virtue of a payment or of it causing a conflict of interests. In addition firms will, of course, need to comply with the other regulatory and legal requirements that bind them, including carrying out appropriate due diligence.
LEAD BY EXAMPLE
In its note of case studies, the SRA gives 11 non-exhaustive examples of when firms would and wouldn’t be in breach of rule 14.5, which range from the somewhat subtle to the glaringly obvious. In February 2017, before the case studies were published, the SRA also provided some guidance in a “Question of ethics”. Here the practitioner is well aware of rule 14.5 and wants to ensure they don’t infringe it. The adviser acts for a couple in the sale of a property they own as joint tenants. Following completion, the clients explain they are getting divorced and each sends different instructions about distributing the sale proceeds. In an effort not to breach the SRA Accounts Rules, the practitioner’s first thought is to simply split the sale proceeds between the two clients. However, as this is a joint retainer, the firm cannot distribute the monies without the clients’ joint agreement or a court order. It seems likely the clients will now need separate legal advice to reach an agreement. Holding the clients’ money in these circumstances would not constitute providing banking facilities, but the firm cannot hold on to the funds indefinitely and so instructions will need to be sought regularly or, should both clients agree, the proceeds could be transferred to one of their solicitors in the matrimonial proceedings, pending an agreement or court order. The ethical lesson these cases remind us of is the need to balance our duty to act in each client’s best interest against our other regulatory obligations. Reading the introduction to the Principles that will govern solicitors’ conduct from November 2019, the SRA reminds us: “You should, where relevant, inform your client of the circumstances in which your duty to the Court and other professional obligations will outweigh your duty to them.” That’s not something clients always find easy to hear, but it’s something practitioners must find in themselves to say – a failure to do so could be a tragedy.