SRA’s client money warning: partners need to replace money at once

Costs: Firms cannot remove money while client account is short

Law firm partners have been told that they must dip into their own pockets to replace any shortages on client accounts immediately upon discovery.

A new warning notice issued by the Solicitors Regulation Authority (SRA) said this obligation applied whether the shortage was within or without the firm’s control, such as a cyber-attack.

“The managers of a firm are jointly and severally responsible for replacing the shortage,” the notice said, adding that, in the general law, trustees in breach of trust also have a duty to replace a deficiency.

“If you are 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 is irrelevant that fault may not lie with you personally.”

Offences under the Fraud Act 2006 may be committed once partners were on notice that money was missing if they did not act “properly and honestly”, it added.

The SRA cautioned that a deficient client account would likely be distributed pro rata, meaning solicitors “may well breach” their duty to act in the best interests of clients if they paid client money into an already deficient account without fully informed consent.

“It is highly unlikely a properly advised client would pay funds into a deficient account with the risk of only receiving a proportion back. Failing to inform clients exposes them to a risk of loss.”

Further, until missing money is replaced, firms should not take costs from the client account.

“It is not in the best interests of the firm’s clients to do so and risks using other clients’ money to subsidise a client’s costs. Any money taken for costs in these circumstances is serious misconduct which may give rise to disciplinary action.”

SRA chief executive Paul Philip 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.

“Ultimately, solicitors have a trusted position when they hold client money, and it is in the best interests of every solicitor to maintain that trust.”

Speaking on a Legal Futures webinar last month, Mr Philip said the cost of regulation would “drop like a stone” if solicitors were not allowed to hold client money.

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