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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.