Winding up a client relationship
Tracey Calvert explains why compliance remains critical right to the very end of a relationship
A few legal headlines have grabbed my attention in the past few weeks and convinced me that there is still no reason to throw away my metaphorical soap box and stop highlighting compliance no-brainers.
There are three main reasons why I take out my compliance soap box: first, the lack of effective supervision; second, the fact that good-quality and backside protecting attendance notes are often hard to find; and third lack of attention to detail at the end
of a relationship.
It’s the latter I’d like to explore in this article. My usual starting point for this discussion is what can bluntly only be described as sloppiness as the end of the lawyer-client relationship. This is a compliance crunch point when clear communication and consistency in action must be evidenced.
Questions practitioners should ask themselves at this stage include; have we said goodbye to a client in a way that makes it clear that we have completed the task in hand? Can this decision be justified by reference back to the retainer we scoped at the beginning, and adapted as necessary as we went along, and is there evidence of this? Has this fact been checked by anyone? Have we explained to the client the position we are leaving them in, and what this means for them in the future? How future-proofed is this position or have they been told when they might need to reconsider their position?
File housekeeping must also take place. Have we closed the file promptly, and considered what documents we are keeping? Do these documents belong to us or to the client? Are we in possession of original client-owned documents which must be handed back? Is the client aware of our storage, retention and destruction policies? Are there outstanding undertakings which either need to be closed down or accurately diarised lest we forget? What client monies are we holding and is there any reason why we cannot account to the client (or a third party) immediately?
Don’t forget that with monies held at the tail end of the relationship, we are straying into the dangerous waters of banking operations and residual balances. These are two topics to which the Solicitors Regulation Authority (SRA) has a very unforgiving nature. With banking, we have a specific prohibition in the SRA Accounts Rules and warning notices with copious case studies to guide our understanding and provide us with clarity about what is, and is not, acceptable.
These case studies are valuable training materials and it is important to consider whether fee-earners’ understanding is aligned with that of the firm’s compliance professionals and the SRA.
In the most recent case studies, we are told that holding unconnected money in a client
account is prohibited, as is lack of availability of UK banking facilities as a reason for retention. In earlier case studies, which are still valid, we were advised that holding on to funds at the end of a retainer was likely to place the firm in breach of the Accounts Rules. Do you have a policy that is used to pre-empt a breach of this nature?
Residual balances are also an issue with which the SRA has little patience. Our knowledge about self-waivers with which to make withdrawals from client account should not mask the fact that this means that we are holding on to money which does not belong to us and we have lost track of the rightful owner. The firm’s COFA will demonstrate the correct compliance attitude if they are vigilant about these unclaimed sums of money.
Read nothing into the fact that the current Accounts Rules is silent, in contrast to the previous rules, about the need to keep in
touch with clients and third parties when holding on to their monies. The SRA’s guidance notes which describe what the regulator expects, and what might be taken into account in disciplinary actions, inform us that we should have checks and controls to make sure client files are closed promptly and prompt payments are made to clients of any residual balances, and that we should have systems to make sure that clients and others are kept regularly informed when funds are retained. These systems, the SRA says, should help ensure that our client account is not being used as a banking facility when there is no need to hold onto monies.
With all this regulatory direction, it should come as no surprise that the SRA takes a dim view of non-compliance. In May, a COFA, his fellow partners, and the firm itself were fined a collective sum of £40,000 for failing to deal with 979 residual balances which amounted to £468,000 (albeit that the smallest amount was 2 pence) for lengthy periods of time.
Developing these themes, it is equally important to be compliance-minded when considering the end of a different type of relationship; the relationship between an employee and the law firm employer. Sadly, we all know that is a topical discussion given the peculiar circumstances we find ourselves in. This ending requires an understanding of legal, regulatory and ethical behaviours and the fact that failings can have consequences. Two more headlines make these points for me.
Firstly, earlier in the summer, a law firm had to take a partner-level colleague to court for the return of client files which she had taken home to work on during the pandemic lockdown and had not returned to the firm despite the fact that she had decided to leave the firm. Notwithstanding the fact that the files were returned by the date of the scheduled hearing, the departing partner was ordered to pay the costs of the application.
It is a fact which is sometimes convenient to forget, that clients instruct firms and not individuals within the firm, that their contract for services is with the business, and that if a fee-earner leaves the business then the default regulatory position is that they cannot assume to take clients with them.
Do you have processes, understood by all, about managing client relationships if their fee-earner leaves the firm? Do you have protocols to follow when a fee-earner announces their intention to leave, both in terms of handover of knowledge and the information which must be given to the client?
Secondly, it is necessary to consider the ownership of paperwork and risks to client confidentiality and data protection duties
when an individual leaves the firm. In July, we read a report of a senior solicitor who was rebuked by the SRA and ordered to pay costs for what was described by the individual as an ‘innocent mistake’ when trying to take precedents and templates with her when she left a law firm.
The materials contained confidential information thus creating a tension with the fundamental duty of confidentiality which is owed to a client. This is not a new phenomenon. Compliance requires a managed approach to departures: does access to firm property and client information need to be restricted? What conversations on firm exit should take place?
In summary, a firm’s compliance culture can be accurately assessed by reference to how well it deals with these pinch points and the buy-in there is to dealing with these matters. If file or matter closure is deemed to be an administrative task, then gaps in compliance will quickly appear. If departing colleagues are not managed in terms of their expectations and what they can take with them, then the consequences are messy. We all know the benefits of compliance consistency and this applies to the end of relationships as much as at any other time.
Tracey Calvert is a consultant at Oakalls Consultancy Ltd oakallsconsultancy.co.uk