Trust account management
Trust accounts are regulated under ss110 – 116 of the Lawyers and Conveyancers Act 2006 and regulations made under s115.
The Lawyers and Conveyancers Act (Trust Account) Regulations 2008 cover:
- the duties of practices in regard to trust accounts and clients’ money, and restrictions on their use
- trust account records required to be kept
- trust account supervisors (formerly trust account partners), their reporting and training requirements
- audit restrictions
- functions and powers of the inspectorate
- reviews and investigations
- contributory mortgages.
The trust account supervisor course requirements are included as schedules to the regulations.
Lawyers Trust Account Guidelines
These guidelines are to assist lawyers with providing a system for handling client money and valuable property, and for administering trust accounts in law practices. They have been updated to reflect changes introduced by the LCA 2006 and the LCA (Trust Account) Regulations 2008 and were approved by the Law Society Board on 6 November 2008. They replace the guidelines from the previous yellow booklet issued to all lawyers.
Financial Assurance Scheme
The scheme covers all lawyers who provide regulated services except those who, on their own behalf or as directors or shareholders of an incorporated firm, do not:
- receive or hold money or other valuable property in trust for any person; or
- invest money for any other person; or
- have a trust account; or
- receive fees or disbursements in advance of an invoice being issued.
The financial assurance scheme – established in 1998 – remains intact in the new regulatory regime. The Law Society inspectorate continues under the LCA regime, funded by a separate levy on lawyers in practice on own account.
The objectives of the financial assurance scheme are:
- ensuring compliance with the act, regulations and any practice rules
- detecting theft or behaviour likely to result in loss of client money
- discouraging improper practices in the handling of money entrusted to lawyers
- demonstrating there is an effective scheme in place.
Inspections
Most firms will be visited routinely twice within a six-year cycle: once by an inspector and once by a compliance review firm, acting under delegation. The cost of the inspectorate visit is funded from the Financial Assurance levy. However, if further visits are required, the costs of these visits are charged to the practice. The costs of compliance reviews are payable by the law practice under review.
The inspectorate also supports the work of the Complaints Service, undertaking investigations as required.
The work of the inspectors and the contracted reviewers enables the Law Society to monitor the accounting procedures and work practices of all law firms. Disciplinary records are also used to profile lawyer groups most at risk of theft or lesser breaches of trust accounting requirements, facilitating targeted inspections. In meeting the consumer protection objectives of the new legislation, one-to-two partner firms – the most at-risk group – will be targeted for inspection more often than others.
In carrying out inspections, their focus will be on the trust accounting procedures and controls of firms. However, inspectors will also be checking compliance generally with the regulations and any rules, such as the Rules of Conduct and Client Care. Their objective will be primarily educative, ensuring, for instance, that firms are aware of client care obligations, such as providing required information when accepting instructions.
"Deemed" receipt of money
A lawyer (or firm) will be "deemed" to have received money belonging to another person if (a) that person, or a bank or other agency acting for or on behalf of that person, deposits funds by telegraphic or electronic transfer into the bank account of the lawyer or firm; or a person or body related to the lawyer; or (b) a lawyer or incorporated firm takes control of money belonging to that person.
As couched, the provisions will catch lawyers using third party trust accounts or dealing with funds electronically or otherwise in situations where they have previously claimed they were not "handling" funds.
Barristers and trust accounts
The regulations leave open the question of barristers having trust accounts. Refer to Chapter 14 of the Rules of Conduct and Client Care (RCCC).
While a barrister cannot receive or hold money or other valuable property for or on behalf of another person, there is no prohibition against receiving fees or disbursements in advance of an invoice being issued. However, Section 112(2)(b)(iv) makes it clear this would trigger the obligation to keep records in respect of trust accounts and valuable property.
Note Rule 14.7 of the RCCC: a dispensation for a barrister to accept instructions directly may be subject to any terms and conditions the society considers appropriate – including any requirements in relation to keeping a trust account and compliance with the trust account regulations.
The rules anticipate that barristers sole might be able to hold trust accounts, but only for taking fees in advance. However, if they do so, they may be subject to the same obligations as their barrister and solicitor counterparts – including the need to complete the Flying Start and trust account supervisor programmes.