Law Soc advises on client money held in insolvent banks
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The Law Society has issued a practice note to clarify the position of firms that deposit client money in a bank that goes bust.
The advice follows widespread fears that firms holding client money could be held liable and unprotected if client money was lost if a bank went under (as reported by TheLawyer.com, 7 October).
After taking advice from external counsel, the Law Society said it is unlikely that firms could be accused of negligence if client money was lost in a collapsed bank so long as the firm was not negligent in holding the money.
The Law Society's director of legal policy Mark Stobbs said: "This is an unprecedented situation and ultimately it is for individual solicitors to assess where the risks lie."
Firms had specifically requested the Law Society's guidance on the issue in a bid to clarify their position, though Stobbs admitted that the advice could not be legally watertight.
"The guidance is intended to be helpful but we are in uncharted waters and given the different situations that can arise and the different situations in which firms are in, it's very hard to give specific advice."
One managing partner said: "What we and most others would want is something that sets out the standard position so we're all operating on the same playing field and everybody knows where they stand."
A partner responsible for risk management at another City firm called the advice "encouraging".
The note gives little specific advice, but advises firms to consider moving clients' money where there are "reliable public doubts about an institution's solvency", though firms are not required to have knowledge of the same level as financial experts, nor know more about an institution than is already public.
The practice note also states that firms are allowed to divide money among separate client accounts, distribute client money between different banks to spread the risk, as well as notify clients of the risks, though it judged neither of these options mandatory.
The Law Society note expressly warns about giving undertakings to pay money, as is sometimes the case in real estate closings, as such undertakings must be honoured even if a bank has collapsed.
The note added that while solicitors were free to negotiate undertakings, in certain transactions it would be against client's best interests to give limited undertakings.
Readers' comments (3)
Frank Maher, Legal Risk LLP | 10-Oct-2008 7:33 am
Law Soc advises on client money held in insolvent banks
The Practice Note could usefully have said rather more really in several respects. The analysis on liability in negligence is rather less than a complete picture and there are in any event about 6 other bases of potential liability, though there are releatively straightforward solutions to each, at least in relation to clients rather than third parties.
On undertakings it 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.'
Yet it it is not incumbent on solicitors to assume personal liability, simply because (a) that is in the best interests of clients and (b) solicitors are insured: guidance note 26 to rule 10 of the Code of Conduct says ‘You are not obliged to give or accept undertakings.’ We can no longer be sure our insurers will be good for the money in the event of a catastrpohic bank failure which would impact across an insurers' entire book of solicitor business, and in any event there are significant issues of aggregation, limits of indemnity and excesses.
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Tony Guise, GUISE | 10-Oct-2008 4:37 pm
Law Soc advises on client money held in insolvent banks
The advice not to limit the scope of undertakings is hugely problematic from a conduct perspective but fairly easily defended in terms of civil liability in the event of a collapse of a bank providing purchase funds, for example. If conveyancers were to follow the advice it could lead to the conveyancing system freezing up rather like the banking system. What next!
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Frank Maher, Legal Risk LLP | 13-Oct-2008 8:02 am
Law Soc advises on client money held in insolvent banks
The Law Society seems to have recognised that the original guidance on undertakings was wrong and withdrew it on Friday. There is some revised guidance on undertakings but not a solution. Undertakings remain the harder part to resolve in practice; taking of client money is easier to resolve, but the reference to limiting liability and rule 2.07 is missing the point.
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