Whilst it is probably unfair to compare the SRA’s Investigations team with the Spanish Inquisition …
The SRA have noticeably increased their interaction with regulated firms over the last 12 months. Many firms are finding themselves on the radar of the regulator without a clear understanding of what has generated the interest. In many cases it is because of a simple complaint about service but sometimes it can be the result of a more serious issue. Whatever the reason, it is often sufficient for the SRA to raise enquiries into the general financial conduct of the firm, and in particular the management of client money. We know that the new simplified Accounts Rules focus on three key principles:
- You ensure client money is kept safe
- You only use client money for the purpose for which it is being held
- You ensure that client money is returned promptly to the client as soon as there is no longer any proper reason to hold those funds
At Financial Eye, we work with many firms and we know that all firms have Residual Balances. Some firms have a bigger problem dealing with these than others, but we help firms to quantify and monitor these balances and to formulate processes to deal with them appropriately.
It is now more important than ever that firms can demonstrate that they have a robust system for dealing with Residual Balances, in a compliant manner. The SRA have said that firms who knowingly misuse their clients’ money are likely to be referred to the Solicitors Disciplinary Tribunal. The Tribunal is clear that a finding of dishonesty will lead to a solicitor being struck off the Roll unless there are exceptional circumstances.
In the last 3 weeks, the Solicitors Disciplinary Tribunal has struck off a matrimonial solicitor who oversaw improper withdrawals from the client account of his firm. Between 2012 and 2015, the solicitor was found to have improperly taken out more than £47,000 from the client account. He was also found to have cleared off residual balances on client accounts to a value of almost £4,000 by issuing bills of costs and paying them from client funds when there was no proper justification.
He denied trying to clear residual balances through 17 bills of costs, saying he honestly and reasonably believed the sums billed were properly due to his firm in respect of work carried out for clients. But the tribunal said the invoices were not consistent with others the firm had raised: some were handwritten and the majority did not contain an address. There was no evidence any of the 17 bills had been sent to clients. The solicitor denied dishonesty, but the tribunal found he must have realised that in not taking steps to ensure clients had the invoices he was acting dishonestly.
In mitigation, the solicitor said he was not aware of accounts problems until after the departure of the firm’s cashier. Monies had already been repaid to clients where appropriate and progress was being made to bring the accounts and reconciliations up to date. He was ‘mortified’ to find the client account had a shortage and he believed the firm had taken steps to improve the running of his firm. He would immediately lose his sole source of income if he was struck off, and he supported his wife and three children.
But the tribunal said his culpability was high and he had acted in breach of a position of trust. Clients were deprived of their funds for two and a half years. The tribunal considered that this was a sad case and recognised that the consequences of the imposition of a strike-off would be significant. However, the need to maintain the trust that the public placed in the profession and the provision of legal services was paramount.
The tribunal felt that If they did not strike him off, there was risk of harm to the public from the message that would be sent to the profession that it was acceptable to help oneself to small amounts of client money even if subsequently it was repaid.
Apparently, the real Spanish Inquisition were required to give due notice, much like the SRA. So actually, everybody expected the Spanish Inquisition! Just make sure you are ready for the consequences.
Financial Eye have a wealth of experience assisting firms with interaction with regulators, planning, financial risk management and compliance. Please get in touch with us if you would like to discuss how we and our team can help you.