City firms move to safeguard client accounts
Several major City law firms are considering changing their terms of business in client engagement letters to take account of the current banking crisis.
The firms, which spoke to The Lawyer on condition of anonymity, have indicated that the issue of safeguarding client accounts is actively under discussion. One magic circle partner said: “We expect to see terms of business going out which exclude all liability for a crash of a bank.”
A handful of firms in the top 20 have already contacted the Law Society for guidance, fearing that billions of pounds they hold on behalf of clients could be left unprotected if the firm's bank should go bust.
A Law Society spokesperson said: "The Law Society believes that the total amount held in client accounts is probably more than £3bn."
The worries have heightened against a background of the increasing threat to UK banks, as the Government has hammered out plans to extend the guarantee for personal savings deposits to £50,000.
In any case, the Financial Services Compensation Scheme does not extend to large firms and corporate entities.
The Law Society's director of legal policy Mark Stobbs hopes to issue advice that will set out that if a bank that held client funds for a firm went insolvent, the firm would generally be safe from legal action from the client unless the firm was negligent in choosing a bank.
The problem would be one for the client to take up with the financial regulators.
Law Society president Paul Marsh said: "We urge the Government to sort out the banking crisis which is leading firms and their clients to be concerned about money held in client accounts. We are in talks with the SRA and we will be issuing a practice note shortly to give solicitors the best advice that is available."
Smaller firms with a turnover of no more than £6.5m a year, a balance sheet of less than £3.26m and no more than 50 employees could remain protected under the Financial Services Compensation Scheme for a maximum of £50,000 per client.
Readers' comments (9)
Robert Pest | 8-Oct-2008 9:38 am
phew
good thing all banks were nationalised this morning then!
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Frank Maher, Legal Risk LLP | 8-Oct-2008 2:33 pm
City firms move to safeguard client accounts
On what basis can one say that 'the firm would generally be safe from legal action from the client unless the firm was negligent in choosing a bank'? There would be an immediate breach of the SAR because the required funds per the solicitors' accounts were no longer held in the bank account. Solicitors' terms of business do not usually provide that the risk is with the client (and even that may not be a complete solution.)
There may be answers to this issue but they are not obvious, and I doubt lack of negligence is one of the available defences.
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City partner | 8-Oct-2008 4:21 pm
Client Accounts
I've always found that asking your industry body is not a completely solid defence from a third party suing you! Turning around to a client and saying sorry, the account's gone down and the government's going to pick up the first 50k is not a conversation I would want to have. I suspect we're not actually liable, but there is a significant client relationship issue here.
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Tony Guise, GUISE | 8-Oct-2008 5:18 pm
Client account exposure
Changing terms of business is not much of a defence either since such variations must be consensual. Can't see any client wanting to agree that and such approaches are hardly likely to instil confidence in the firms in question!
Since choice of Bank will not be negligent if they are High Street, clients will be opting to bring claims based on rule breaches and aiming at the Compensation Fund. There may be defences available in that arena. Can anyone remind me which representative Council recently decided to reduce our contributions to the Fund?
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Frank Maher, Legal Risk LLP | 9-Oct-2008 7:40 am
City firms move to safeguard client accounts
Having thought about it further over night, I don't think the solution need be that difficult and may not even require a change of terms of business if you go about it the right way.
I think I have identified a route through it for one firm; in essence, you just need to identify the causes of action (of which I've identified potentially 5 or 6 so far) and address each individually and systematically; most seem capable of resolution with one of three approaches so I don't think it needs vast amounts of documentation. Though doubtless a testing in anger would expose some potential flaws in this!
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Anonymous | 9-Oct-2008 9:03 am
safety of client accounts
the answer ? move your client funds to an Irish bank
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Peter Rogers, Bristol | 9-Oct-2008 11:37 am
Exposure to undertakings
I believe there may be a further risk here which cannot be addressed via engagement terms, namely of exposure to third parties to whom a firm has given financial undertakings to pay money on a certain date/in a certain event, or to hold funds to order.
This may be addressed via suitable caveats eg "I undertake to instruct my bank to pay", rather than "I undertake to pay", but the funds to order issue is more of a problem and in any event such wording may well be commercially toxic.
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Frank Maher, Legal Risk LLP | 9-Oct-2008 9:35 pm
City firms move to safeguard client accounts
The Law Society has now issued a Practice Note dealing with this point which says 'You should not attempt to limit your undertakings because acceptance by a buyer's solicitors of such a limited undertaking risks not discharging the seller's charge if the bank fails.
This is not in the interests of clients. Any undertaking you cannot honour is a claim against you and your insurers.' I do not understand why it is said that the solicitor should assume personal liability because it is in the best interests of the client - why should solicitors be guarantors of their clients' finances? Even the guidance to the Code of Conduct does not propose that extreme position - guidance note 26 to rule 10 says 'You are not obliged to give or accept undertakings.' Undertakings are an administrative convenience, not a professional obligation.
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Richard Lane, Legal Finance Professionals Limited | 13-Oct-2008 2:03 pm
Interim Practice Note Updated!
The interim practice note issued by the Law Society has already been updated!
The major change appears to be the advice in relation to undertakings and the removal, inter alia, of the sentence quoted by Frank Maher below.
There is now a note from the President, Paul Marsh, stating, "Looking specifically at conveyancing, solicitors have a key role in the conveyancing process. Without solicitors, clients cannot move from house to house on the same day. This is our unique selling point in the market, and the Society's focus is on preserving this role. So while your liability for undertakings is of clear concern, it is important not to overreact, particularly in light of government statements of support for depositors. Solicitors may wish to review where they hold clients' money, but it would be disastrous to threaten the strength of our undertakings in conveyancing transactions, and so undermine our status as the lynchpin of the property market."
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