What an extraordinary start to the year it turned out be. Despite what it may sound like or look like from the outside, compliance is rarely dull. You just never know what is around the corner. If on the other hand you are a COFA or supporting a COFA it is not quite the excitement you are necessarily searching for. Imagine coming into the office (if you are allowed to) and finding a letter from your bankers advising you that in 60 days, they will be closing your office and client accounts. This really happens. We have spoken to two firms already this year who have received such a letter. The really worrying thing is there is absolutely nothing you can do about it. You have 60 days in which to open new bank accounts, get approval from lenders and to notify all your clients that you will be appointing new bankers. Of course, that is if you can find a new bank that will help you.
These are interesting times to say the least. It was not that long ago that solicitors’ client accounts were highly coveted things amongst the banking community. There were always healthy sums deposited in the client account attracting healthy rates of interest and the banks made good money from them. In the new world we now speak of negative interest rates, so the main way a bank can turn a decent profit is via lending facilities to the firm. If a firm has little requirement for borrowing then it becomes far less attractive.
So, what factors will put a firm under the bank’s microscope? Well, there are a few, starting with cash. We all know how AML is becoming more and more restrictive and the obligations on banks are also increasing. Banks and Financial Institutions are being fined substantially for AML failures in their clients. Therefore, regular payments of cash into a firm’s client account will attract the attention of your bank.
All firms have obligations under AML, however it is not always as clear as it might be. For example, the COFA might not appreciate that when monies are being received from the client’s bank to their client account, that the client is paying in regular cash sums to their own bank account. This could easily come to the attention of the SRA, as well as HMRC and possibly the SFO. It is the kind of activity that could lead to your bank terminating its banking arrangements with you.
We often come across a really dangerous situation where a long-standing client of the firm, whom they have continually acted for on a number of transactions, asks them to hold on to funds at the end of a matter. There is usually a good reason for this, however there is no longer any underlying legal transaction. This is a breach of the Accounts Rules and one that is of great interest to the SRA, use of a client account as a banking facility. A typical reaction of the fee-earner concerned is to explain how they have acted for this client for years and there have never been any issues before. This is the worst kind of response as it demonstrates that the firm may not take its regulatory obligations seriously.
An even more common example of this is that solicitors have traditionally held large sums of money for clients by way of commercial rent deposits. The SRA has been clamping down on this and promoting the use of third-party managed accounts to avoid firms acting as bankers.
The big question is what can a COFA or legal cashier do to prevent this sort of thing happening to them? This is a tough one, particularly in a firm where the Managing Partner is also the COLP and/or COFA. The firm may have had the same bankers for 50 years and there may even have been qualified Accountants Reports but nothing “too serious” so the firm has stayed off the SRA radar. This is what we see as the perfect storm. If there was ever a time to implement a firm wide COFA compliance review the time is now. It is much better to do this when the regulator has shown no interest in the firm. It is much harder when they ask to see files, ledgers and bank statements and your documented compliance procedures for review. An unqualified AR1 will not suffice in this situation. They will be looking for a lot more information.
My advice would be to ask the Managing Partner what they would do in the event they receive a letter saying the firm’s bank accounts will be withdrawn in 60 days. If they respond by saying that could never happen to us, you could be in for an almighty shock. As if 2020 was not bad enough, welcome to the new world of 2021.
On that happy note I will leave you just one thought, now is the time to be pro-active and not to bury your head. These things never go away unless you have an honest conversation and get on top of them before it is too late.