By Elaine Pasini, Head of Communications at Legal Futures Associate ILFM
What happens when legal cashiers face issues surrounding client credit card payments? The Institute of Legal Finance & Management (ILFM) are often the first port of call from our members and law firms in general, when thinking of taking on credit card payments for client accounts.
Offering credit card payments allows a law firm to accept a wider range of audience and therefore more prospective clients. However, with that offering comes risk.
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Credit card questions, whether for litigation funding, settlement fees or pure client account specifics are vital to get right in legal finance to stay clear of SRA fines and breaches.
Credit card payments and consumer rights adhere to Section 75 of the Consumer Credit Act 1974.
SRA Accounts Rules and Disbursements
When your client pays money on account for disbursements by credit card, you or your legal cashier, will deposit those fees directly into your client account. Thereafter you will transfer them to your firm’s office account (to reimburse them if they had to paid out initially for that disbursement), after the relevant clearance period has passed.
A reminder as to what a disbursement is; it is any sum spent, or to be spent, on behalf of the client or trust (including any VAT element). Examples include court fees and counsel’s fees.
Under the SRA Accounts Rules 2019, client money should be paid into a client bank account under Rule 2.3* and it is for this reason that a credit and/or debit card facility will have to be linked to the client bank account rather than the office bank account for most firms.
If a client is disputing your services but say, you have already paid counsel’s extensive fees as a disbursement, then the card issuer refunds your client which results in a pending debit on your client account, as small law firm or sole practitioner, this is where risk comes into play.
* Client money must be paid promptly into a client account unless any of the exceptions under rule 2.3 apply.
Section 75 of the Consumer Credit Act 1974
Under Section 75 of the Consumer Credit Act 1974, the credit card company is jointly liable for any breach or misrepresentation by the retailer or service provider and as the service provider in this instance, it is the law firm.
Under this act, consumers can claim misrepresentation or services not supplied. Being in law and finance, we understand this is often a grey area! Your credit card company is liable to refund 100% of the cost of the service (providing it is over £100) even if your client (known as “consumer” in the act) has only paid an initial deposit.
Example of a dispute
An example: if a solicitor in your firm agreed a fixed fee of £15,000.00 for their services, and the client has paid £500.00 on account, the client could raise a dispute and recover the full £15,000.00 as well as their £500.00 deposit.
Why could this be an issue? Ultimately credit card companies tend to act upon the word of the consumer as the Consumer Credit Act 1974 can be quickly enforced to protect the consumer (your client!).
Credit Card Payments set up on Client Accounts
Although we are all “consumers” in some form or another with services or retail, when it comes to looking after the accounts and finances within a law firm, there are going to be implications if there are card payments set up to credit their client account.
Many of us know to book a holiday, for example, on our credit card because we have more protection if there is a problem or a dispute.
In terms of legal service payments, the credit card company would protect the client as its consumer by finding the payment in question and reversing it out of the client account, rather than work on communications or digging deeper into the dispute with you as the firm.
Often, the first inkling the law firm or finance director knows about the credit card recall is when they see those funds being withdrawn from their client account. It is usually the legal cashier who is the first person to see this, and it’s important that they are supported and have the confidence to know the steps for action.
Having a fully ILFM qualified legal cashier in a law firm accounts department should be a requirement in all law firms across England and Wales.
If your law firm and accounts department have their client accounts linked to credit card transactions, we would urge you to have a policy to follow in the instance of any possible funding recall or reversal under Section 75.
SRA Accounts Rules and Client Accounts
As mentioned above, monies paid into client account are there for a specific purpose as detailed by the SRA Accounts Rules. This usually means that the funds are withdrawn very shortly after receipt for the purpose that they are intended. Funds are only held for longer periods upon specific instructions from the client and for a select few case-types and this is where there might be risk.
For example: a client pays £5,000.00 for a fee earner’s invoice through their credit card. The solicitor working on that matter will raise an invoice through their accounts department and software, then transfer the monies from the client account to their office account to cover it. This leaves the client ledger showing a balance of zero.
However, the client, under Section 75, has the right to raise a dispute (complaining about the service or another reason why they should be refunded). Law firm credit controllers are used to clients disputing invoices before they have been paid, but when the monies have already been paid by the client’s credit card and they want a refund, is another matter.
As mentioned above, in this scenario, your (disputing) client’s credit card company will refund their money (£5,000.00) and then it will attempt to recover the same from the “supplier”, which of course, is your firm and client account.
We have seen cases where there is a breach of the SRA Accounts Rules because the law firm is unaware of the pending debit until it’s too late. The £5,000.00, in this instance, will overdraw that client’s client account ledger and effectively be using other clients’ monies to settle the dispute.
For small law firms this could be risky because of the usual financial costs of running a firm with huge PII fees, salaries and constantly checking cashflow. Recent years have seen too many small firms or sole practitioners struggle for various reasons so understanding the implications of credit card payments and Accounts Rules for business responsibility and peace of mind.
A practical tip to mitigate against this risk could be to create a policy limiting the payment amount your firm will accept via credit card (for example, £3,000) and, instead, requesting payment of larger sums via other methods. As well as the transaction costs of taking high payments via credit card, it will reduce the risk of having to return large sums of money, which for smaller firms, can have a huge detrimental effect on cashflow.
If you’d like to receive more resources or articles on this subject please contact Elaine at the ILFM directly through her email firstname.lastname@example.org