SRA Issues Warning Reminding Firms to Replace Money Missing from Client Accounts

On 21st June 2024, the SRA issued a warning notice to law firms about the requirement to address any shortages in client accounts promptly. The warning highlights the severe consequences of failing to replace missing client money, emphasising the need to uphold public trust in the legal profession. The SRA warning is aimed at UK law firm managers, compliance officers for legal practice (COLPs) and compliance officers for finance and administration (COFAs).

Warning To Replace Missing Client Funds Without Delay

The SRA’s new warning stresses that any shortage in a client account must be rectified without delay. Failure to do so risks breaching regulatory standards, undermines clients’ financial security, damages public confidence, and can lead to severe legal and financial repercussions for the firm.

Relevant Principles And Regulations

The warning relates to several SRA Principles in addition to the SRA Code of Conduct for Solicitors, RELs and RFLs, the Code of Conduct for Firms, and the SRA Accounts Rules 2019.

SRA Principles

The warning reminds law firms that they have a duty to ensure that client money is kept safe at all times and that operating a deficient client account may cause them to breach one or more of the SRA Principles, including:

• Principle 2: Maintain public trust and confidence in the solicitors’ profession.
• Principle 4: Act with honesty.
• Principle 5: Act with integrity.
• Principle 7: Act in the best interests of each client.

SRA Code Of Conduct For Solicitors, RELs And RFLs

• 4.2 – You safeguard money and assets entrusted to you by clients and others.
• 6.4 – Where you are acting for a client on a matter, you make the client aware of all information material to the retainer of which you have knowledge.

Code Of Conduct For Firms

• 3.5 – You are open and honest with clients if things go wrong, and if a client suffers loss or harm as a result, you put matters right.
• 5.2 – You safeguard money and assets entrusted to you by clients and others.
• 6.4 – Where you are acting for a client on a matter, you make the client aware of all information material to the retainer of which you have knowledge.
• 8.1 – If you are a manager, you are responsible for your firm’s compliance with this Code.
• 9.2 – If you are a COFA, you must take all reasonable steps to:

– Ensure that your firm and its managers and employees comply with any obligations imposed upon them under the SRA Accounts Rules.

– Ensure that a prompt report is made to the SRA of any facts or matters that you reasonably believe are capable of amounting to a serious breach of the SRA Accounts Rules which apply to them.

SRA Accounts Rules 2019

The SRA Accounts Rules mandate that any breaches be corrected immediately. Key rules include:

• Rule 1.2: Managers are jointly and severally responsible for compliance with these rules.
• Rule 6.1: Breaches must be corrected promptly. Any money improperly withheld or withdrawn must be immediately paid into the account or replaced.

A Reminder Of How The Courts View Client Money Shortfalls

The SRA’s warning refers to the landmark cases of Bolton v The Law Society [1993] and Levy v SRA [2011], which affirm the inviolable nature of client money in the eyes of the court.

The courts have consistently ruled that client money can only be used for client matters, and any deficiencies must be rectified immediately to maintain trust and compliance. As the warning states, “The courts have held that client money is sacrosanct and proper stewardship of it is vital”.

What Are The Consequences Of Missing Client Money?

A shortage in a client account can have wide-ranging implications:

• Firms must replace deficiencies in client accounts as per SRA Accounts Rules.
• Managers are jointly and severally responsible for this replacement.
• Trustees in breach of trust must also replace deficiencies.

Operating a deficient client account may lead to a breach of trust and legal issues.

If missing money is not replaced promptly, the firm may not lawfully operate the account and might need court directions.

• Deficiencies on client account affects all clients of the firm, risking the use of other clients’ funds to facilitate those transactions.
• Paying into a deficient account without informed consent breaches the duty to clients.
• Costs should not be taken from a deficient account; doing so is serious misconduct.
• Failing to replace missing money risks SRA intervention and disciplinary action.
• The firm must still address client account deficiencies due to theft or cyber-attack, and
• Offences under the Fraud Act 2006 may apply if the firm does not act appropriately upon noticing missing money.

Responsibilities Of Firm Managers And Compliance Officers

Law firm managers and COFAs must take all reasonable steps to prevent and address deficiencies, including:

• Maintaining accurate and up-to-date accounting records.
• Implementing robust internal controls and supervision mechanisms.
• Ensuring immediate investigation and action against any staff involved in financial impropriety.
• Adopting appropriate accounting procedures, including ensuring that systems are in place to maintain accurate records and regular reconciliations.
• Establish clear reporting lines and encourage staff to report any concerns.
• Continuously reviewing and managing financial risks.
• Managers may need to use personal resources or obtain loans to rectify the shortage.
• Notifying insurers.
• Reporting client account shortages to the SRA in line with regulatory obligations.

Final Words

The SRA’s client account shortfall warning is a reminder of the high standards expected in managing client money. Firms must always promptly address deficiencies and uphold the integrity and trust essential to the legal profession. The warning also serves as a reminder that compliance with the SRA’s regulations is a legal obligation and a fundamental aspect of maintaining public confidence in legal services in the UK.We have been helping solicitors and other legal professionals with disciplinary and regulatory advice for 28 years. If you have any questions relating to an SRA investigation or an SDT appearance, please call us on 0151 909 2380 or complete our Free Online Enquiry.