SRA Accounts Rules – Rule 14.5: what does it all mean?

Rule 14.5 is unique within the SRA Accounts Rules in being uncertain in its ambit and in the need to apply relatively vague concepts to infinitely variable facts in order to determine whether the rule and the prohibition within it applies or does not. Unhappily, from the point of view of the busy and well-intentioned practitioner, the true meaning of the rule and the SRA’s attitude to and interpretation of it continue to evolve. There is, for example, no definition of “banking facilities”.

It is convenient first to set out the terms of the rule and its associated guidance:
“You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”

“Rule 14.5 reflects decisions of the Solicitors Disciplinary Tribunal that it is not a proper part of a solicitor's everyday business or practice to operate a banking facility for third parties, whether they are clients of the firm or not. It should be noted that any exemption under the Financial Services and Markets Act 2000 is likely to be lost if a deposit is taken in circumstances which do not form part of your practice. It should also be borne in mind that there are criminal sanctions against assisting money launderers.”

A diversion into the history of the rule is instructive. The first mention of “banking facilities” was in note (ix) to rule 15 (“Use of a client account”) of the Solicitors’ Accounts Rules 1998. That was in radically different terms and envisaged that such facilities could properly be provided. The note read:
“Solicitors may need to exercise caution if asked to provide banking facilities through a client account. There are criminal sanctions against assisting money launderers.”

It will be seen that the link between regulatory concerns and the risk of money laundering is a constant theme. In December 2003 the Solicitors Disciplinary Tribunal found that solicitors called Wood and Burdett were doing something that was plainly wrong though it was not covered by any specific rule. The firm had disapplied the Cheques Act in relation to its client account and was offering a cheque-cashing service to all and sundry in Merseyside, clients and non-clients, to “diversify” the business.

In consequence on 17 March 2004 a guidance note was added to the Accounts Rules making express reference to the Tribunal’s judgment in Wood and Burdett and stating that:
“Solicitors should not, therefore, provide banking facilities through a client account”.

The 1998 Rules were to be “interpreted in the light of the notes” so there remained no specific rule. The rule to which this note was appended was that which required client money to be paid into a client account without delay and that only client money should be paid into client account (with specified exceptions). There was no obvious connection between the rule and this particular guidance.

The next material development was on 6 October 2011 when the 2011 Accounts Rules came into force. The previous guidance note became a rule, 14.5, quoted above but the associated guidance remained the same, in exactly the same words, though the words: “decisions of the Solicitors Disciplinary Tribunal” were substituted for a reference to Wood and Burdett.

Accordingly, anyone reviewing the rules would only have found, by researching the history, that “banking facility” was exemplified by the extreme facts of Wood & Burdett, at least until 29 November 2012 when a judgment was handed down on an appeal from the SDT in a case called Patel [2012] EWHC 3373 (Admin) which it is likely that only regulatory lawyers would have noticed at the time. The facts in Patel were as follows and were found to offend the Wood & Burdett principle:
“2. … One of the firm’s clients was a company, Club SYR Ltd (“Club”), whose principal was Mr Yap. That company’s business included a scheme for the importation of expensive motor vehicles from Germany at reduced prices, to be sold in this country at a substantial profit. The purchases were made with the assistance of funds from investors. Two significant investors were B and M, large car dealerships. B and M were not prepared to provide funds to Mr Yap directly, because of the failure of his previous business. They wanted some assurance that the moneys would be sent to those selling the vehicles.

3. Under an arrangement with Mr Yap, outlined in a client care letter of 31 March 2006, the appellant agreed to hold the funds which B and M advanced in a special client account “to provide the security to [B] and [M] they require”. The client account used was for Club as the client and was entitled “German Autos”. Other investors in the scheme included two members of the Bar. They paid funds into the German Autos client account. In a letter to one of these investors on 30 July 2008 the appellant recalled that Mr Yap had asked him to confirm that funds received from them, on pro forma invoices issued by Club for orders for vehicles, would be utilised for the purpose of securing the order (“vehicles only for you”). The appellant explained that he would send the funds direct to the vehicle manufacturers. Should the transaction not proceed within 7 days, the funds would be returned in full within 7 to 14 days on written demand. Once the vehicles were on the transporter to this country property would pass. “The agreement between the 2 companies [i.e. Club and the investor] are only as above.”

4. Funds were received by the appellant under these arrangements. The appellant confirmed the receipt of the moneys to investors and, if necessary, that they were held for the purpose of securing and supplying vehicles to the investor. When the vehicles were sold the appellant distributed the profits in accordance with the arrangements. The appellant checked invoices, purchase orders, and other documentation for the purpose of ensuring that funds were released properly in accordance with the arrangements. In the case of B and M the appellant’s work was limited in this way.”

Even on the basis of Patel the facts which might be regarded by practitioners to involve the provision of a banking facility remained fairly extreme.

Patel distinguished between two elements of the retainer; that which offended the rule which involved no ‘underlying legal transaction’; and the other which did involve some legal work and which in consequence involved no breach:
“10. In its “findings of fact and law”, the Tribunal found that, in the case of the B and M transactions, the allegation was proved because there were no underlying legal transactions. The work described in the 2006 client care letter was not legal work which, in fact, had been accepted on Mr Patel’s behalf in the 13 November 2009 letter. The drawing up of the joint venture agreements in the case of the other investors was legal work. There was no breach in relation to that. The scheme of using the appellant’s client account had been conceived because Mr Yap could not use the conventional banking system. It was designed to overcome the lack of trust investors had in Mr Yap. It was inconceivable that a client would approach a solicitor for his legal expertise to do the work which the appellant had undertaken for B and M. The work could have been done by a clerk or in a non-legal office.”

Thus, what might be described as bare stakeholder services were held to infringe the rule, although the status of a solicitor as a professional of inherent trustworthiness does not seem to have been considered relevant.

The next development was the judgment in Fuglers [2014] EWHC 179 (Admin) which was handed down on 5 February 2014. The facts of that case were summarised thus in the appeal judgment:
“11. … The gravamen of the charges was that the Appellants had allowed the Firm’s client account to be used by a client of the Firm, Portsmouth City Football Club Limited (“the Club”), as a banking facility over a period between 5 October 2009 and 8 February 2010. During this period the account had been used to receive payments in from the Club and others, and to transfer out many payments to service the Club’s day to day trading activities. A total of about £10 million passed through the account in this way over the four month period. The transactions took place via two client ledger accounts which were set up for that purpose. Throughout that period, the Club’s banking facilities had been withdrawn by its bank because HMRC had presented a winding up petition on 1 October 2009. Mr Berens was aware of the petition shortly after 5 October 2009. The winding up petition was subsequently withdrawn on 12 November 2009, but a second petition was presented by HMRC on 22 December 2009.

12. Throughout the period the Club was in a perilous financial state and subject to negotiations for its purchase by a consortium of potential buyers, for whom the Firm was also acting. In February 2010 the Firm ceased to act for the Club and the Club entered a Company Voluntary Arrangement which was formally approved in June 2010. The company, Portsmouth City Football Club Limited, went into liquidation later that year, and the football club continued its activities through another corporate structure.”

A common feature of Patel and Fuglers was a conscious avoidance of a problem which inhibited use of the ordinary banking system: in Patel, the lack of trust of third parties in the firm’s client; in Fuglers, the client’s insolvency. It is relevant to the way in which the interpretation of the rule has changed in that it now seems obvious that Fuglers were wrong in what they did, but it did not seem so at the time. Indeed, the question as to whether or not there was a breach was fought out between leading counsel in the SDT over four days.

The SRA’s guidance emerged on 18 December 2014. A relevant extract is as follows:

“Private Client Services

Historically, some solicitors have agreed to receive and hold funds for clients to enable them to pay routine bills and invoices on their clients' behalf. This has been predominately for the clients' convenience as they may be based abroad or because they are incapacitated so that operating their own bank accounts is problematic.

In view of technological advancements, in particular the ease of internet and telephone banking, we consider that allowing client account to be used in this way is no longer appropriate. Clients can now operate their bank accounts from their own homes or indeed from anywhere in the world. Allowing clients to hold anonymously what might be significant funds in a client account gives rise to significant risks in relation to potential money laundering or other breaches of the law, such as exchange control consent regulation. The anonymity of client accounts is attractive to criminals.

In each case, you must therefore carefully consider all of the relevant circumstances and the risks involved before you agree to hold funds in this way. You should be prepared to justify your decision to us where necessary.

This guidance is not intended to affect your ability to make reasonable and proper payments on your client's instructions when related to an underlying legal transaction on which you have been instructed, for example, upon completion of a house purchase on your client's instructions under Accounts Rule 20.1(f). Once a transaction is complete, we would remind you that Rule 14.3 provides that client money must be returned to the client promptly, as soon as there is no longer any proper reason to retain those funds. If you retain funds in client account after completion of a transaction, the risk of a breach of Rule 14.5 increases. Risk factors of laundering in particular would involve the payment of substantial sums to others, including family members, or to corporate entities, particularly overseas, since there is no reason why the client could not receive the money into their own account and transfer it from there.”

Two points arise from this: first, there appears to be a tacit acceptance that in the past private client services could properly include a form of banking for convenience; and second, the SRA’s view is that this should not happen any longer because it was no longer necessary.

Accordingly, it became apparent that what the rule meant was capable of being changed by external factors, such as the availability of alternatives. This would appear to be less than satisfactory.

Rules made by the SRA under powers delegated to it by the Law Society and in accordance with statute (the Solicitors Act 1974, the Legal Services Act 2007 and others), are secondary legislation to which the ordinary canons of construction apply.

An indication of the uncertainty surrounding the rule can be seen in the variable results of applications which have been made to the SDT. About twenty applications have been made based wholly or in part on this provision in one or other of its successive forms (excluding those already mentioned) but in four cases, a fairly high percentage, the allegation has failed. In one of these: Walker and Nathan 10640-2010, the SRA invited the SDT to give general guidance as to the ambit of the rule (a very clear indication that uncertainty was accepted to exist) which the SDT declined to do.

In my opinion the best authoritative attempt at the correct construction of the rule occurred in Patel. Both the judgments of Moore-Bick LJ and Cranston J grappled with the principle. The following are relevant extracts. Per Moore-Bick at [43]:
“Rule 14.5 of the SRA Accounts Rules refers to instructions relating to an underlying transaction or a service forming part of the solicitor’s normal regulated activities. The expression “regulated activities” includes in this context all forms of legal activity as defined in section 12 of the Legal Services Act 2007. That means the provision of legal advice or assistance in connection with the application of the law or with any form of resolution of legal disputes and the provision of representation in connection with any matter concerning the application of the law or any form of resolution of legal disputes. It follows that in most cases the receipt of client funds will result from the provision of services forming part of the solicitor’s normal regulated activities, but some recognised professional services, such as acting as an executor, will not fall into that category. There is clearly scope, therefore, for funds to arise from underlying transactions of a kind which, although they form an accepted part of the professional services provided by solicitors, do not fall within the definition of regulated activities. They are likely, nonetheless, to be legal activities in the broad sense of the expression….”

And per Cranston at [18]:

“Use of the term “instructions” in the next sentence of the rule implies professional instructions, in other words instructions relating to the accepted professional services of solicitors. The term is being used in rules concerned with the work of solicitors and takes its meaning from that context. Thus the import of the first limb of the second sentence of rule 14.5 is that movements on a client account must be in respect of instructions relating to an underlying transaction which is part of the accepted professional services of solicitors. In shorthand the instructions must relate to an underlying legal transaction. The other limb of that second sentence requires that movements on a client account must be in respect of instructions related to a service forming part of the normal regulated activities of solicitors. That is a provision the ambit of which is to be measured in terms of the regulatory regime for solicitors.”

This analysis is capable, in my opinion, of being developed into a checklist involving three questions.

The first question should be: are the solicitors engaged in “regulated activities”?

These are defined so as to include not only reserved activities but also:
“the provision of legal advice or assistance in connection with the application of the law or with any form of resolution of legal disputes and the provision of representation in connection with any matter concerning the application of the law or any form of resolution of legal disputes”

so the answer is likely to be yes in most circumstances.

Moore-Bick LJ extends the category of permitted work to include “other recognised legal services” which would include such matters as executor work and impliedly the administration of estates.

So the second question is: if the services are not “regulated activities” are they nevertheless “legal activities in the broad sense of the expression” and an “accepted part of the professional services provided by solicitors”.

This is likely to be wide enough to capture very nearly everything that solicitors might be asked to do, but not absolutely everything, as the bare stakeholder service in Patel confirms.

But in addition to the underlying work having to be in one of those categories the instructions for the movement of money have also to relate to the work in question.

So the third question is: are the movements of funds on client account pursuant to “instructions” in relation to “the accepted professional services of solicitors” – which should be taken to mean anything within the two categories referred to above.

The normal shorthand employed by the SRA, particularly in prosecutions in the SDT, is to refer to the absence of “an underlying legal transaction” (it will have been noticed that Cranston J also referred to the phrase as “shorthand”). While this may be convenient from a drafting perspective it does not truly, in my opinion, reflect the analysis of the court in Patel.

The test adopted in Patel was whether a service is being provided which would be an “accepted part of the professional services of solicitors”. The SRA guidance focuses on “advice” relating to an underlying “transaction” whereas the rule and the judgments refer also to “instructions” relating to “services”. In my opinion the better approach is, if “advice” is to be the touchstone as suggested by the SRA, to focus on “advice” relating to a professional service (as opposed to advice relating to a transaction, because not all work is transactional). To refer to a transaction is to my mind to add confusion, rather than assistance. Neither litigation nor trust-related work (for example) need involve any “transaction” in the traditional sense and while the rule may be very much concerned with conveyancing it is not in my view intended to be limited in that way.

The proposed new Accounts Rule 3.3 intended to replace the current rule 14.5, on which the SRA consulted in 2016 and which is likely to come into force in the autumn of 2018, is in my opinion consistent with this analysis. That reads:
“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.”

“Regulated services” is a new glossary term defined as:
“the legal and other professional services that you provide that are regulated by the SRA, and includes, where appropriate, acting as a trustee or as the holder of a specified office or appointment.”

It will be noted that there is no reference at all to “transaction”. Further, the reference to “trustee or as the holder of a specified office or appointment” also reflects the Moore-Bick judgment.

In my view the proposed new rule has its drafting origins in the same analysis of the judgments in Patel.

While I have, as a consequence of successive instructions from a number of firms of solicitors, been developing my understanding of the rule and devising the checklist as above, the situation has continued to evolve. As a result of a dialogue which I have had with the SRA further helpful guidance has been obtained, though this has not been published. I have a letter dated 13 March 2017 from the Head of Guidance at SRA Professional Ethics from which I am able to provide redacted extracts. To put this into context, I gave advice to a firm of solicitors and also advised that my advice be disclosed to the SRA, for their comments if they wished to make any but in any event to demonstrate that my clients could not be criticised for acting on my advice. The letter to which I have referred is the substantive response from the SRA. The text is as follows:
“I apologise for the delay in responding substantively on the issues raised. We have however considered these carefully, and reviewed existing case law, and our rules and guidance on the application of rule 14.5, across the board. As you may know we have recently consulted on changes to our Accounts Rules, and are in the process of finalising these. Your query and the work we have done as a consequence, will enable us to clarify the position going forward and we will be looking at whether any changes should be made to our existing guidance in the interim.

In the meantime, I would take this opportunity to clarify that it is not our intention to restrict work normally undertaken by solicitors where the transaction does not carry any inherent risk, such as those referred to in the warning notice - providing a banking facility, risk of money laundering, insolvency or risk of insolvency.

Given that there is an underlying professional retainer which allows for the holding of the funds, and the clearly defined circumstances in which they can be paid out, we would not consider this to be a breach of 14.5, although we would of course expect you to be satisfied with the evidence presented and be able to demonstrate that:-
• there is no concern regarding money laundering, insolvency or fraud, and
• you are satisfied you fully understand the purpose of the payment and that both the payment and the recipient are bona fide.”


Accordingly the intention of the SRA is that the interpretation of the rule should be influenced by the presence or absence of risk. Of course this is not wholly satisfactory; such matters sit uneasily beside a rule which has to be interpreted as secondary legislation, but as an indication of the regulator’s attitude to enforcement it is exceedingly valuable.

On this basis we can refine our checklist with a different and perhaps easier list of questions; namely:
a. Is there an underlying professional retainer which allows for the holding of the funds?
b. Are there clearly defined circumstances in which the funds can be paid out?
c. Is there is any concern regarding money laundering, insolvency or fraud? and
d. Are you satisfied that you fully understand the purpose of the payment and that both the payment and the recipient are bona fide?

I can understand, in the present regulatory environment and having regard to the degree of interest shown by the SRA in rule 14.5, that virtually any firm of solicitors could be concerned about providing a “banking facility”, or being accused of doing so.

Equally, solicitors should not be discouraged from conducting normal legal business and providing normal legal services which they have been doing for years or decades, as a result of a perception that something they have been doing routinely is intended to be prohibited overnight. Plainly that is not the SRA’s intention.

The intention rather is to guard against highly specific risks, and the very first iteration of the ‘rule’ and its reference to money laundering continues to be a guide to the real purpose.

Andrew Hopper QC
20 June 2017

 

 

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