New guidance on law firm obligations to protect client money should a bank collapse  

Earlier this year, The Law Society published a Practice Note on protection for client accounts. This is relevant for all solicitors who deal with client funds.
It clarifies that firms are unlikely to be liable for negligence should client money be lost following a bank collapse, provided that the money has been placed in accordance with the Solicitors Regulation Authority's (SRA) Accounts Rules. However, any final decision would rest with the courts. 

Key requirements under SRA accounts rules

The Practice Note re-emphasises the SRA Accounts Rules; namely the requirement to place client money in a client account at a bank or building society; that these institutions must have FCA permission to accept deposits; that these institutions must be in England or Wales; and, that interest, where payable to clients, must be at a fair rate (but need not be the best rate). 

Compensation through FSCS

In the event of a collapse of a bank, lost client monies may be eligible for compensation under the Financial Services Compensation Scheme (FSCS). This is the UK’s statutory compensation scheme for customers of financial services firms. If a firm is unable to make payments to clients because of financial issues of a bank, the FSCS can pay compensation to those clients. However, such payments are subject to a current limit of £85,000 per claimant. Eligible claimants can be:

• Individuals (or joint individuals where the £85,000 limit applies to each individual) 
• Small companies 
• Large companies (although some exclusions apply) 
• Small local authorities 

The FSCS must pay deposit compensation for verified claims within three months of the failure of the institution. However, the FSCS aims to pay compensation within seven days of failure of a bank or building society, rising to 20 days for more complicated claims. 

Client consent and information sharing

Of particular note, is a requirement for solicitors to obtain client consent before providing the FSCS with their details. However, specific consent is not required if it is already addressed in the client retainer or elsewhere and this is possibly an area for firms to consider when engagement documentation is updated.

Firms may wish to state in their terms of business that, if the firm is to make a claim under the Financial Services Compensation Scheme (FSCS), the client agrees that the firm will provide certain information about the client to the FSCS to assist in the identification of clients and the amounts that they may be entitled to. 

Given the nature of client money held by firms, there may be circumstances where balances are relatively high. The FSCS provides a £1million protection limit for temporary high balances, however, this cover is only related to specific life events and to natural persons.

While the FSCS will consider claims on a case-by-case basis, this covers sums paid to the depositor in respect of: 

• real estate transactions: property purchases, sale proceeds, equity release (this only applies to a main residence and excludes buy-to-let properties or holiday homes) 
• benefits payable under an insurance policy 
• personal injury compensation 
• disability or incapacity state benefits 
• claims for compensation for wrongful conviction 
• claims for compensation for unfair dismissal 
• redundancy (voluntary or compulsory) 
• marriage or civil partnership 
• divorce or dissolution of civil partnership 
• benefits payable on retirement 
• benefits payable on death 
• a claim for compensation in respect of a person's death 
• inheritance 
• proceeds of a deceased’s estate held by their personal representative 

The Practice Note contains detailed guidance on the actions that should be taken when making a compensation claim. When a claim is made full names and addresses of clients, together with evidence of client money balances must be provided.