Solicitors' Firms Are Not Banks: A Timely Warning From The SRA

Solicitors and law firms are subject to strict regulatory financial controls for a raft of reasons.

For instance, to uphold public trust, minimise the risks of money laundering and prevent the inappropriate hiding of assets.

However, accounts rule breaches and wider concerns have prompted the regulator to issue an updated warning notice reminding the profession of the risks of improper use of client account as a banking facility. They are (as the regulator bluntly puts it) “not regulated as a bank to provide such facilities” – doing is “objectionable in itself”.

Use of client account as a banking facility is prohibited and the Solicitors Regulation Authority have been warning solicitors for years. The SRA Accounts Rules clearly 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” (Rule 3.3).

This would seem to be clear enough; and firms and managers need to be careful not to fall foul of the rules, even where it’s tempting to do so for the sake of convenience.

Yet breaches continue to happen. In June 2022, for example, sole practitioner John Ioannou was fined £2,500 for using the client account as a banking facility, mostly inadvertently and due to oversight. The SDT agreed that there had been “no overt motivation, rather there had been an absence of critical thought and analysis which he should have been applied to the offending transactions”.

SRA guidance

The guidance from the regulator has been updated to reflect its continuing concerns at how client account is being used in some cases. The notice clarifies that r3.3 reflects SDT decisions to the effect that it is not a proper part of a solicitor's everyday business or practice to operate a banking facility for clients - or other third parties.

Proper connection - Solicitors are expected to assess whether a transaction involves any risk factors, even where it is normal routine work. Funds must only be received into client account where there is a ‘proper connection’ between receipt of the funds and the solicitor’s delivery of regulated services.

At the start of the retainer, solicitors must discuss with clients how their money will be dealt with, including appropriate arrangements where the client does not have a bank or building society account.

The guidance expands on the meaning of ‘proper connection’ – and you should note that the mere existence of a retainer does not automatically mean funds can be processed freely through client account. It must be justified; and this will depend on the facts of each case.

Money laundering risks – The SRA warns firms to remain alert to any unusual or suspicious factors, including issues around the source of funds or what clients asks you to do with them. The regulator criticises the practice of firms who make multiple transfers of money between ledgers of different clients or companies without evidence of the purpose or legal basis for such transfers, breaching r3.3.

The warning notice includes case studies to help ensure compliance. If the SRA becomes aware of a firm acting as if it were a bank – even advertently - and the firm is unable to justify a decision made in relation to money in client account, disciplinary action could be taken.

The warning notice can be found here.


Posted on 01.06.23