The SRA has published its new Warning Notice (21 June) warns against funds missing from a firm’s client account. The SRA has made it clear shortages will not be tolerated.
Whilst the SRA hasn’t reported any sanctions decisions relating to this issue in particular recently, the warning notice outlines the risks of firms failing to quickly address a shortage.
Firms will note the relatively recent closure of Axiom Ince last year, where the SRA reported the largest shortage in client account funds of £64m.
SRA's Warnings
The SRA’s warnings are as follows:
- Firms have an obligation to replace immediately any money missing from a client account
- Replacement of funds is to be carried out regardless of the underlying reasons – even where there’s been circumstances beyond the firm’s control for example by way of a cyber-attack, or administrative errors or, dishonest acts by employees
- There’s a clear duty in the accounts rules to replace a deficiency, and managers of a firm are jointly responsible for doing so
- Firms that continue to transact with a shortfall on their client account risk using other clients’ funds to facilitate those transactions
Employee Behaviour
The SRA provides indicators when identifying behaviour amongst employees that may indicate a problem. This includes failure to deliver bills or a written notification of costs, any suggestion of over-charging, and a sweeping up of residual balances.
Steps To Take
Paul Philip, chief executive at the SRA has said: “Caselaw is very clear that the client account is sacrosanct. However, firms do report shortages on the client account for a variety of reasons. Our rules are also very clear – you must make good on any deficit promptly. A shortage on the client account presents a risk to all clients for whom you hold money.”
- Managers are advised to immediately investigate and take action against any member of staff who may have acted dishonestly regarding the client account, and to take regular steps to monitor, review and manage risks
- If you identify that money is missing, you have a duty to take steps to ensure it’s replaced, in full, immediately
- If you’re a manager of the firm, you have a duty to replace missing client money from your own resources. It may be necessary for you to obtain a loan to do this. It’s irrelevant that fault may not lie with you personally
- You need to notify your insurer. You may be able to make a claim on your professional indemnity insurance. The obligation to remedy a breach of the SRA Accounts Rules 2011 is treated as civil liability for the purposes of clause 1 of the Minimum Terms and Conditions
- If you identify a shortage, you should report the matter to the SRA in line with your obligations under paragraph 7.7 of the Code of Conduct for Solicitors, RELs and RFLs and paragraph 3.9 of the Code of Conduct for Firms
Enforcement Action
On enforcement action, the SRA warns that failing to replace client money will usually lead to an intervention. Even if money has been replaced, it may be that an intervention is necessary to deal with what caused the problem, such as dishonesty, in order to protect the clients and the public.
Firm Closures
The SRA has also addressed the issue in the context of firms heading for closure, given this can’t happen if there are client balances remaining in a firm’s account.
The SRA has advised any firms seeking to close that they should send all client money to clients, pay counsel fees and bill for outstanding costs.
The notice adds: “If your client account has a shortage, you cannot undertake any of these actions and therefore you cannot close your firm until the shortage is replaced.”
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