Alternatives to Client Accounts – Part 2

In my last blog, I wrote about the Law Society’s consultation on alternatives to client accounts. It’s a highly-charged subject. These are my personal thoughts on the matter.

Looking after someone else’s money always carries huge responsibility.  It’s a fiduciary arrangement, with the equitable duties arising from that relationship. The SRA Accounts Rules – now in version 14 – provide further overlay. Together, these impose considerable responsibility.

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My question is – can you avoid all this, do you need a client account at all? A client account is not a badge of honour: rather, it is another significant risk to manage, diverting attention from client outcomes unless the need for a client account is an integral part of the firm’s offering. Plainly, if you carry out transactional work, such as residential conveyancing, then a client account is essential. But can you manage without one, for example using the agreed fees mechanism within Rule 17.5 of the Accounts Rules? See my blog on this subject, dated 19 November 2015. If you do need a client account, can you reduce the scope of its use?

By raising red flags on client account frauds, and consulting on alternatives such as third-party operated accounts, but simultaneously removing client accounts with small balances or few transactions from the scope of compulsory accountants’ reports, the SRA is giving a mixed message. Surely fraudsters will switch their attention to firms with small client accounts, knowing that oversight will be less onerous – and a fraud possibly less likely to be spotted.

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I know of no evidence-based research that a third party-operated account will reduce the risk of fraud. Clearly such an arrangement will reduce the scope for ‘dipping in’ by persons at the firm, but I have seen no analysis concerning external fraud. Absent independent evidence, the case for abandoning client accounts is unconvincing.

Further, anecdotal evidence from France (which operates an escrow system) suggests that third-party operated accounts introduce bureaucracy, delay, and cost. These are inimical to client objectives.

I favour the retention of solicitor client accounts, subject to a need threshold. Given the acknowledged risks, firms with no requirement for a client account should not have one. Firms with a client account should prove that they have clear and effective anti-fraud systems and controls, which should be proportionate and risk-based. The SRA Guidelines on Accounting Procedures at Appendix 3 to the Accounts Rules barely address this: reporting accountants should be required to comment on anti-fraud systems and controls. Failures such as those that occurred on both sides in Purrunsing -v– A’Court are totally unacceptable. Firms with sloppy practices have got to get a grip – or face the consequences.

Checking accounts

A good starting point is to implement the simple precautions detailed in the excellent SRA papers ‘Spiders in the web’ and ‘In the Shadows’. Be honest! – how many of you have read them?

So, your COLP should have a hard look at what you are doing, and your COFA should consider how you are doing it. Do you really need a client account, could you get by without one? Convenience is not a justification. Rather, the question should be ‘is this an essential part of client outcomes?’ If it isn’t, then restructure. If it is, then consider how you can reduce the need.  If you keep the client account, review your anti-fraud systems and controls: are they fit for purpose, and does your team understand both the avoidance techniques and the bigger picture? Do they ‘join the dots’ to detect fraud?

At Enderley, we have a great deal of experience in anti-fraud systems and controls and in setting up agreed fee procedures. If you want to improve your risk profile, please get in touch.

 

Ed Austin

Solicitor

May 2016