Learning Outcomes
This article explains the obligation under the SRA Accounts Rules 2019 preventing solicitors from using client accounts to provide banking facilities. After reading this article, you should be able to understand the rationale behind this prohibition, identify situations that constitute a breach of the rule, recognise the associated risks and consequences, and apply the rule to practical scenarios relevant to the SQE1 assessment. Your understanding will assist in tackling multiple-choice questions focused on client money handling and professional conduct.
SQE1 Syllabus
For SQE1, you are required to demonstrate a practical understanding of the SRA Accounts Rules 2019, particularly concerning the proper use of client accounts. This includes the specific obligation not to provide banking facilities through a client account. Your knowledge will be tested on identifying breaches and understanding the regulatory implications.
Pay particular attention in your revision to:
- The precise requirement of Rule 3.3 SRA Accounts Rules 2019.
- The rationale supporting the prohibition (eg preventing money laundering, maintaining professional integrity).
- Identifying transactions that improperly use the client account as a banking facility.
- The relationship between the movement of funds and the delivery of regulated legal services.
- Consequences of breaching Rule 3.3, including disciplinary action and links to other regulations.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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According to Rule 3.3 SRA Accounts Rules 2019, payments into and withdrawals from a client account must be in respect of what?
- Any instruction from the client.
- The delivery of regulated services.
- Any related commercial transaction.
- Payments approved by the firm's COFA.
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Which of the following scenarios is LEAST likely to constitute providing banking facilities through a client account?
- Holding proceeds of sale for a client indefinitely after completion while they decide how to invest it.
- Paying a client's routine household bills from money held in the client account.
- Receiving funds from a third party unconnected to any legal service the firm is providing, and then paying them out as directed.
- Holding a deposit as stakeholder between exchange and completion in a conveyancing transaction.
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A solicitor receives a large sum from a client with instructions to hold it and make various payments to the client's family members over the next year. The payments are unrelated to any legal services the firm is providing. What is the solicitor's primary obligation?
- Follow the client's instructions as part of client care.
- Refuse the instructions as it breaches Rule 3.3.
- Seek SRA authorisation before making the payments.
- Transfer the money to the firm's business account first.
Introduction
The SRA Accounts Rules 2019 ('the Rules') govern how solicitors and firms regulated by the Solicitors Regulation Authority (SRA) must handle money belonging to clients and others. A fundamental requirement is the proper use of the client account. This article focuses on the specific obligation found in Rule 3.3, which prohibits the use of a client account to provide banking facilities, exploring its scope, rationale, and practical application for SQE1 candidates.
The Purpose of Client Accounts
A client account is a specific type of bank or building society account maintained by a firm authorised by the SRA. Its primary purpose is to hold client money separate from the firm's own money (business money), as mandated by Rule 4.1.
Key Term: Client Money
Money held or received by a firm relating to regulated services, including money held on behalf of third parties (eg stakeholder money), as a trustee, or for fees and unpaid disbursements prior to billing (Rule 2.1).Key Term: Business Money
Money belonging to the authorised body (the firm).
This separation is essential for safeguarding client funds, ensuring they are available when needed for the client's matter and protected in the event of the firm's insolvency.
The Prohibition: Rule 3.3 SRA Accounts Rules 2019
Rule 3.3 states: "You must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawals from a client account must be in respect of the delivery by you of regulated services."
This means that the movement of money through the client account must have a direct and necessary link to the legal services the firm is providing in a specific matter. Holding or moving funds simply for the client's convenience, or for transactions unrelated to the firm's legal work, is prohibited.
Key Term: Banking Facilities
In the context of Rule 3.3, this refers to services typically offered by banks, such as holding deposits indefinitely, making payments unrelated to legal services, or enabling transactions that should occur through the client's own bank account.Key Term: Regulated Services
Legal and other professional services provided by a firm that are regulated by the SRA. The movement of funds must be connected to the delivery of these services.
Rationale Behind the Prohibition
The prohibition in Rule 3.3 is supported by several key regulatory and ethical considerations:
Maintaining Trust and Integrity
Solicitors are not banks and are not regulated as such. Using the client account for banking-type transactions trades on the trust and reputation associated with the legal profession without the corresponding regulatory oversight applied to financial institutions. It undermines public confidence (SRA Principle 2) and the integrity of the profession (SRA Principle 5).
Preventing Money Laundering and Financial Crime
Client accounts can be attractive targets for money launderers seeking to legitimise illicit funds by passing them through a regulated entity. Restricting client account use to transactions linked directly to legal services helps mitigate this risk and supports compliance with anti-money laundering legislation (eg Proceeds of Crime Act 2002, Money Laundering Regulations 2017).
Avoiding Insolvency Complications
Allowing a client account to be used as a general banking facility, particularly for clients facing financial difficulty, could facilitate preferential payments to certain creditors or hide assets, potentially breaching insolvency laws (as highlighted in Fuglers & Ors v SRA [2014] EWHC 179 (Admin)).
Identifying Improper Use
Determining whether a transaction breaches Rule 3.3 requires careful consideration of the connection between the movement of funds and the regulated service being provided.
Absence of a Relevant Legal Transaction or Connection
Receiving funds into, or making payments from, the client account where there is no relevant legal transaction upon which the firm is instructed, or where the movement of funds is not intrinsically linked to that transaction, is likely a breach.
Holding Funds Post-Completion
Retaining client money in the client account after a matter has substantially concluded, without a proper reason related to ongoing regulated services, risks breaching both Rule 3.3 and Rule 2.5 (requiring prompt return of client money). Holding funds merely for the client's convenience or future unspecified use is improper.
Worked Example 1.1
A solicitor acts for a client in the sale of their house. Completion occurs, and the net proceeds (£250,000) are received into the client account. The client asks the solicitor to hold the funds for six months while they travel and decide what to do with the money. During this time, the client asks the solicitor to pay their monthly gym membership fee from the funds held.
Should the solicitor comply with these instructions?
Answer: The solicitor should not comply. Holding the funds indefinitely after completion without a specific purpose related to ongoing legal services breaches Rule 2.5 and risks breaching Rule 3.3. Paying the gym membership fee is clearly providing a banking facility, as it is unrelated to the legal services provided (the conveyancing transaction), and is a breach of Rule 3.3. The solicitor should return the net proceeds to the client promptly.
Exam Warning
Be alert to scenarios where a client asks a solicitor to handle payments that could easily be made through the client's own bank account. Convenience for the client is not a valid reason to use the client account. Also, watch for funds being held after a matter concludes without justification linked to the legal service.
Consequences of Breach
Breaching Rule 3.3 is a serious matter with significant potential consequences:
- Disciplinary Action: The SRA may take disciplinary action against the firm and individuals involved, potentially leading to fines, conditions on practice, suspension, or striking off.
- Breach of SRA Principles: Improper use of the client account often involves breaches of SRA Principles, particularly integrity (Principle 5), maintaining public trust (Principle 2), and acting in the client's best interests (Principle 7).
- Enabling Crime: The firm or solicitor could be implicated in money laundering or other financial crimes if the client account is misused, leading to potential criminal liability.
- Civil Liability: If a client suffers loss due to the misuse of the account or associated breaches, they may have grounds for a civil claim against the firm.
Practical Steps for Compliance
To ensure compliance with Rule 3.3, firms and solicitors should:
- Scrutinise Instructions: Carefully question the reason for any request to receive or pay out money through the client account. Ensure there is a clear link to the specific regulated services being provided.
- Understand the Transaction: Have a clear understanding of the relevant legal transaction or matter. Do not process funds if the transaction is unclear or appears suspicious.
- Due Diligence: Conduct appropriate client due diligence, including verifying the source of funds, especially for large or unusual transactions.
- Return Funds Promptly: Strictly comply with Rule 2.5 and return client money promptly once the matter is concluded or there is no longer a proper reason linked to the regulated service for holding it.
- Maintain Clear Records: Keep detailed records justifying the movement of funds through the client account, demonstrating the link to the regulated services.
Revision Tip
When faced with an SQE1 scenario involving client money movement, always ask: 'Is this payment/receipt directly and necessarily linked to the specific legal service this firm is providing in this matter?' If the answer is no, or if it's merely for convenience, it's likely a breach of Rule 3.3.
Key Point Checklist
This article has covered the following key knowledge points:
- Rule 3.3 SRA Accounts Rules 2019 prohibits using a client account to provide banking facilities.
- Payments into and withdrawals from a client account must be linked to the delivery of regulated legal services.
- The rationale includes protecting client money, preventing financial crime, and maintaining professional integrity.
- Using the client account for client convenience or transactions unrelated to legal services is a breach.
- Holding funds unnecessarily after a matter concludes can also breach the Rules (Rule 2.5 and potentially Rule 3.3).
- Breaches can lead to SRA disciplinary action, damage to reputation, and potential legal liability.
- Compliance requires careful scrutiny of instructions and a clear link between fund movements and the legal service.
Key Terms and Concepts
- Client Money
- Business Money
- Banking Facilities
- Regulated Services
