Client account protection in the event of bank failure

The recent collapse of Silicon Valley Bank and Credit Suisse acts as a reminder to law firms of the risk of their bankers falling into financial difficulties, and the potential ramifications for the client money held with these institutions.

All firms that hold client money should be carefully considering the risk of bank failure, and incorporating it into their risk registers.

The current situation gives rise to both the risk of a loss of client money, but also potentially an incentive for clients to seek protection by trying to engage their solicitors to use the client account as a banking facility, in breach of Rule 3.3.

The Financial Services Compensation Scheme

Under the Accounts Rules, and the Solicitor’s Act 1974, firms must hold their client accounts at a branch or head office of a bank in England or Wales. This means that monies held in client account are subject to the compensation provisions of the Financial Services Compensation Scheme (FSCS).

This scheme currently guarantees deposits of up to £85,000 per individual or entity per banking group. Individuals, charities and companies are eligible for the scheme, with a few exceptions. There is also a provision for temporary high balances (held for up to six months) of up to £1,000,000 per individual or entity, per banking group. This is particularly pertinent for law firms, who often hold large amounts of client money for short periods of time, for example when conducting a conveyancing transaction. The FSCS cannot confirm eligibility for the temporary high balances concession until a bank actually fails.

The temporary provision only covers natural persons, and as such monies related to corporate entities, trusts or charities would not be considered.

Each claim will be considered on a case by case basis, but will normally cover situations including the following:

• real estate transactions (property purchase, sale proceeds, equity release - relating to your main residence only. This does not have to be a UK property but must relate to your main residence)
• benefits payable under an insurance policy
• personal injury compensation (unlimited amount)
• disability or incapacity (state benefits)
• claim for compensation for wrongful conviction
• claim for compensation for unfair dismissal
• redundancy (voluntary or compulsory)
• marriage or civil partnership
• divorce or dissolution of their 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 FSCS will typically ask for some or all of the following when assessing a claim under the temporary high balance concession:

• a property sale receipt or agreement
• a court judgement
• a will
• a letter from an insurer regarding an insurance pay out
• a letter from a lawyer, conveyancer, mortgage provider, former employer, pension Trustees
• court orders
• social security statements
• probate/letters of administration
• death/marriage certificate
• land register and HMRC records.

Taking action

In the event of potential or actual failure of a firm’s bank, we would encourage firms to get in contact with the SRA’s Professional Ethics Helpline as soon as they think there may be a potential issue with their bank.

As always, transparency with clients is key. Firms should consider disclosing their bankers to clients within engagement terms, particularly where transactions may involve firms holding significant sums of client money which may be in excess of the FSCS limits .

Given recent well publicised bank failures, we would encourage firms to have a formal disaster recovery plan which could be mobilised quickly and efficiently, including how to identify which client’s funds were held in which bank, how information to lodge an FSCS claim could be obtained and how to request further funds from clients if their matter is due to complete prior to any compensation being received.

For further information, or to discuss anything covered in this insight, please get in touch with Ryan Ketteringham, Ross Prince or your usual Crowe contact.