Joint accounts and third-party managed accounts - Accounting procedures for special account types

Learning Outcomes

This article explains the specific accounting procedures and regulatory requirements for joint accounts, client's own accounts operated by solicitors, and third-party managed accounts (TPMAs). After reading this article, you will understand the key SRA Accounts Rules applicable to these special account types, the solicitor's duties regarding record-keeping and safeguarding money, and the distinctions between these accounts and standard client accounts. This knowledge will enable you to apply the relevant principles to SQE1-style multiple-choice questions concerning these specific account management scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the practical application of the SRA Accounts Rules 2019 to specific types of accounts beyond the standard client and business accounts. This article focuses on the following syllabus areas:

• The operation of joint accounts under Rule 9, including record-keeping requirements.
• The operation of a client’s own account as signatory under Rule 10, including the limited application of the Rules and record-keeping duties.
• The use and implications of third-party managed accounts (TPMAs) under Rule 11, including the solicitor's obligations to the client and the SRA.
• Distinguishing the accounting treatment and regulatory oversight applicable to joint accounts, client’s own accounts, and TPMAs compared to standard client accounts.
• Understanding the solicitor's overarching duty to safeguard client money and assets, irrespective of the account type used.

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.

1. Which part of the SRA Accounts Rules 2019 primarily governs the operation of joint accounts by solicitors?
   1. Rule 5
   2. Rule 8
   3. Rule 9
   4. Rule 11
2. A solicitor operates a client's personal bank account as a signatory under a Lasting Power of Attorney. Which SRA Accounts Rule specifically addresses the requirements for this scenario?
   1. Rule 7
   2. Rule 10
   3. Rule 11
   4. Rule 13

3. True or False: Money held in a Third-Party Managed Account (TPMA) is considered client money under the SRA Accounts Rules 2019.

4. Which of the following is generally NOT a requirement under the SRA Accounts Rules when a solicitor operates a client's own account as signatory?
   1. Obtaining bank statements every five weeks.
   2. Performing account reconciliations every five weeks.
   3. Paying client money promptly into a client account operated by the firm.
   4. Keeping a central record of bills relating to the account.

Introduction

While most client money is handled through a firm's dedicated client bank account, solicitors sometimes encounter situations requiring different account management approaches. The SRA Accounts Rules 2019 provide specific, albeit limited, requirements for scenarios where solicitors operate joint accounts, act as signatories on a client’s own personal bank account, or where firms utilise third-party managed accounts (TPMAs). Understanding these variations is essential for compliance and protecting client interests. This article examines the rules and practicalities associated with these special account types.

Joint Accounts

A joint account, in the context of solicitors' accounts, is an account held at a bank or building society in the joint names of the solicitor/firm and a client or other third party. A typical example is where a solicitor acts as an executor of an estate alongside a lay executor, and they decide to manage the estate funds through a joint bank account.

Key Term: joint account
An account held at a bank or building society in the names of two or more parties, one of whom is the solicitor or firm, used to hold money relating to a client matter or trust.

Since the account is not solely in the name of the firm, it is not a 'client account' as defined by the main Rules. Consequently, most of the detailed requirements in Part 2 of the Rules (e.g., relating to withdrawals, immediate availability) do not apply directly.

However, Rule 9 specifies that certain obligations do still apply:

• Rule 8.2: The firm must obtain bank statements for the joint account at least every five weeks.
• Rule 8.4: The firm must keep a central record of bills or written notifications of costs relating to the matter associated with the joint account.
• Rule 31: The firm must produce documents and provide information regarding the account if requested by the SRA.

Although not explicitly covered by the main client account rules, the overarching SRA Principles, particularly the duty to safeguard client money and assets (Principle 10), remain essential. Firms should implement safeguards, such as requiring joint signatures for withdrawals, to mitigate the risks associated with joint control.

Worked Example 1.1

A solicitor, Priya, is acting as a joint trustee for a family trust alongside the settlor's son, David. They open a joint bank account in both their names to hold trust funds. Priya's firm does not handle any other trust money through this account.

What are Priya's firm's minimum obligations under the SRA Accounts Rules regarding this joint account?

Answer: Under Rule 9, Priya's firm must ensure it obtains bank statements for the joint account at least every five weeks (Rule 8.2) and keeps a central record of any bills raised concerning the trust administration (Rule 8.4). While other client account rules don't strictly apply, Priya must still comply with the SRA Principles, including safeguarding the trust assets.

Operating a Client’s Own Account

Solicitors may sometimes operate a client's personal bank or building society account as a signatory. This typically occurs when acting under a Lasting Power of Attorney (LPA) for property and financial affairs or as a court-appointed Deputy for someone lacking mental capacity.

Key Term: client's own account
A client's personal bank or building society account for which a solicitor or firm employee has authority to operate as a signatory, often under a power of attorney or deputyship.

As the account is in the client's name, the money within it is not 'held or received' by the firm in the same way as money in a client account. Therefore, it is not technically 'client money' subject to the full SRA Accounts Rules.

Rule 10 outlines the specific, limited requirements that apply in this situation:

• Rule 8.2: Obtain bank statements at least every five weeks.
• Rule 8.3: Perform reconciliations between the statements and the firm's records of transactions made on the account, at least every five weeks.
• Rule 8.4: Keep a central record of bills relating to the work done in operating the account.
• Rule 30: Specific record-keeping duties apply, including retaining statements/passbooks.

The SRA acknowledges that obtaining statements and performing reconciliations every five weeks might be impractical in some deputyship or attorney situations. Guidance suggests that if the solicitor takes reasonable steps to ensure the money is safe and documents these steps, a breach may not occur if the five-week deadline is occasionally missed.

Exam Warning

Do not confuse operating a client's own account with holding client money in the firm's client account. The full SRA Accounts Rules do not apply to the former, only the specific requirements outlined in Rule 10. Money in the client's own account belongs entirely to the client.

Third-Party Managed Accounts (TPMAs)

Some firms may choose not to operate their own client accounts, instead using a TPMA provider. Rule 11 permits this arrangement.

Key Term: third-party managed account (TPMA)
An account held with an authorised payment institution, regulated by the Financial Conduct Authority (FCA), which holds money for clients involved in transactions handled by a law firm. The law firm does not hold the money itself.

Money held in a TPMA is not client money under the SRA Accounts Rules because it is held by the TPMA provider, not the law firm. Therefore, the main body of the Accounts Rules does not apply.

However, firms using TPMAs have specific obligations under Rule 11 and the SRA Principles:

• Rule 11.1(a): The firm must not receive or hold the client's money itself.
• Rule 11.1(b): The firm must take reasonable steps to ensure the client understands the TPMA arrangements, including fees, who bears them, and the client's right to terminate the agreement or dispute payments. This must be explained before accepting instructions.
• Rule 11.2: The firm must obtain regular statements from the TPMA provider and ensure they accurately reflect all transactions.
• Due Diligence: The firm must ensure the TPMA provider is appropriately regulated by the FCA (as an authorised or small payment institution with safeguarding arrangements).
• Best Interests & Safeguarding: The firm must be satisfied that using a TPMA is appropriate for the client and that the client's money will be safe (SRA Principle 7 and Code of Conduct para 4.2/5.2).
• SRA Notification: Firms must notify the SRA when they start using a TPMA provider, giving details of the provider and their FCA authorisation number.

Using a TPMA can reduce a firm's administrative burden and potentially lower insurance costs, as the risks associated with holding client money are outsourced. However, the firm retains responsibility for ensuring the arrangement is suitable and properly explained to the client.

Worked Example 1.2

A firm specialising in low-volume conveyancing decides to use a TPMA to handle client funds instead of operating its own client account. Before taking on a new purchase matter for Mr Jones, the solicitor explains the TPMA system.

What key information must the solicitor ensure Mr Jones understands before proceeding?

Answer: The solicitor must take reasonable steps to ensure Mr Jones understands (i) the contractual terms, including who pays any TPMA fees, and (ii) his right to end the TPMA agreement or dispute payment requests made by the firm via the TPMA (Rule 11.1(b)). The solicitor should also explain that the regulatory protections differ from those applying to money held in a firm's own client account.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Joint accounts are held by the firm/solicitor with another party; they are not client accounts, but specific rules (Rule 9) regarding statements and records of bills apply.
• Operating a client's own account as signatory (e.g., under an LPA or Deputyship) means the money is not held by the firm. Specific rules (Rule 10) apply regarding statements, reconciliation, and bills.
• Third-Party Managed Accounts (TPMAs) involve an FCA-regulated provider holding funds. The money is not client money under the SRA Rules. Rule 11 requires client understanding, provider checks, and SRA notification.
• The overarching SRA Principles, especially safeguarding client assets (Principle 10) and acting in the client's best interests (Principle 7), apply regardless of the account type.
• Firms must maintain appropriate systems and controls for all account types they operate or interact with.

Key Terms and Concepts

• joint account
• client's own account
• third-party managed account (TPMA)