Regulatory and Compliance Training & Consultancy

Cavalier Approach to Residual Client Ledger Balances Leads to Solicitor’s Suspension

November 2017

The suspension of Charles Smith, formerly a Member of the firm Clyde & Co, serves as a stark reminder to all about the importance of dealing with residual client ledger balances in a manner that is compliant with the SRA Accounts Rules 2011.

Facts of the Case

In brief, Clyde & Co had significant issues with residual client ledger balances. The documentation before the Solicitors Disciplinary Tribunal (SDT) records that, during 2013 and 2014, the Solicitors Regulation Authority had been in correspondence with the firm regarding concerns over the existence of residual client ledger balances. A subsequent inspection by the SRA's Forensic Investigation team concluded that there were no less than 2,007 client matters with client ledger balance totalling £15,230,900 where there had been no movement on the relevant client ledger for a period of at least one year. Subsequent analysis by the firm, identified that of this amount, £7,324,276 related to inactive matters whilst further client ledger balances totalling £1,609,648 remained under review.

In May 2013 the firm circulated its written policy on clearing residual client ledger balances to all of the firm's UK Members, including Mr Smith. A course of action was agreed between the firm and the Solicitors Regulation Authority. An action plan setting out the process and deadlines for clearing the residual balances was approved by the SRA in January 2014. On becoming the departmental risk partner in March 2014, Mr Smith was made aware of more than 100 residual balances relating to his department. In October 2014, the firm reminded all partners of the need to resolve the residual balances as soon as practicable. This message was reinforced by two reminder e-mails being sent out in November 2014.

The SRA‘s Forensic Investigation report details five client matters where, at Mr Smith’s direction, the dormant balances held on the client bank account were transferred to the firm's office bank account after being applied against invoices that had been raised on those dormant matters. In all of the matters exemplified in the Forensic Investigation report, time had been improperly charged to the relevant matter. In one instance, Mr Smith had transferred time on an unconnected matter, which could not be recovered and was destined to be written off by the firm, to one of the inactive matters before raising an invoice and transferring funds from client to office bank account.

Dishonesty was not alleged by the SRA and the tribunal, in their published Judgement, noted as follows:

“He had been instructed to clear residual balances; that was his motivation, but he had gone about it in the wrong way. He should have made more enquiries about how to carry out his instructions in accordance with the accounts rules. His actions were not planned in terms of committing misconduct. However, the Respondent was quite an experienced solicitor having been admitted in 2004. The Tribunal considered that there had been harm to the reputation of the profession as a result of what the Respondent had done because he was not treating client money properly. He had been cavalier in his approach to the residual balances. The resulting harm to the profession‘s reputation was reasonably foreseeable as a result of the Respondent’s conduct.”

Mr Smith was suspended from practice for a period of three months from 20 November 2017. Additionally, he has agreed to pay the SRA costs of almost £18,000 and faces strict controls on his return to practice for a period of two years, including not being able to act as a sole practitioner, partner, member or director of a firm. He will not be allowed to hold client money or operate a client or office bank account or to authorise payments from a client bank account. Finally, he will not be permitted to act as either a COLP or a COFA for the same period of two years.

Conclusion

We know from our own experience that many firms of solicitors have significant issues with residual client ledger balances. Some firms have recognised the seriousness of the potential regulatory consequences and are taking action, sometimes with our assistance, to tackle their residual balance problems whilst a proportion of firms choose instead to ignore the problems. The existence of residual client ledger balances represents a serious regulatory risk which needs to be addressed. If your firm is struggling to get on top of your residual client ledger balances, perhaps it is time to seek some assistance?

How can we help?

We host our intensive two-hour Residual Client Ledger Balances workshops on a regular basis throughout the year. These workshops will help the firm's Compliance Officer for Finance and Administration (COFA) and Legal Cashiers by taking a practical look at all the relevant rules, namely rule 14.3, rule 14.4, rule 20.1(j), rule 20.1(k) and rule 20.2 of the SRA Accounts Rules 2011. The workshops will also provide you with practical advice which will help to avoid residual client ledger balances building up in the future, as well as looking at what can be done about any existing, and perhaps longstanding, residual client ledger balances.

Why not join us for our next Residual Client Ledger Balances Workshop webinar? Book a place on our 2 hour ‘Residual Client Ledger Balances Workshop’ webinar for just £60 + VAT which is taking place on Tuesday 30 January 2018. Do not worry if you cannot make this date, those who have booked this webinar will have access to a recording of it for fourteen days following the webinar. If you would like to attend, please book your place using the link above or call us on 0330 223 5346 or e-mail us at info@lfpro.co.uk.

Our bespoke in-house SRA Accounts Rules training courses can help to raise awareness amongst both fee earners and finance staff of the requirements of Rule 14.3 and Rule 14.4 of the SRA Accounts Rules 2011 as well as the Solicitors Regulation Authority's exacting expectations detailed in their recent guidance covering residual client ledger balances.

At Legal Finance Professionals, we provide a ‘Residual Client Ledger Balances Clearance Service’ to our client firms. This is ideal for those firms that are struggling to deal with old client ledger residual balances themselves and may cost a lot less than you think.

If you are a Compliance Officer for Finance and Administration (COFA), you need to be fully aware of the compliance and reporting implications that residual client ledger balances involve. Our article looking at Residual Client Ledger Balances and the COFA’s Reporting Obligations explores the issues involved.

If you are just looking to understand the issues surrounding residual client ledger balances a little better our guidance document entitled, ‘Dealing with Residual Client Balances under the SRA Accounts Rules 2011’ has proved to be very popular and provides advice on how to tackle your residual client ledger balances.

If you would like to discuss residual client ledger balances problems or other SRA Accounts Rules 2011 issues, please contact Richard Lane on 0330 223 5346 for a confidential discussion.