Reserve Bank deposits guarantee scheme
The latest information about the scheme and how it relates to lawyers' trust accounts will be updated on this page.
Several articles about the Government's deposits guarantee scheme have been published in LawTalk over the past few months:
Bank guarantee scheme, LawTalk 722, 2 February 2009
Bank deposits guarantee scheme, LawTalk 721, 1 December 2008
Lawyers and the bank deposits guarantee scheme, LawTalk 719, 3 November 2008
Notice to members, 4 December 2008
On 20 November, the Society received a letter from a Treasury solicitor advising that the Crown's policy intention in amending the deed was to ensure that: "Where a creditor held money (presumably under a normal bank/customer contractual relationship) for a number of persons under a bare trust the $1 million cap would apply to each beneficiary of that bare trust and not to the trustee." The letter went on: "This is how the Crown, as guarantor, will interpret the deeds of guarantee and you may reassure lawyers on this point provided they are holding client funds as a bare trustee."
The Treasury advice (including the extent to which lawyers may safely rely upon it) is being considered, in light of the current terms of the deed, by the Society’s legal advisers.
In the meantime, the Society has obtained legal advice that:
Lawyers hold funds in their trust accounts for clients as trustees for their clients who are the beneficiaries of the trust funds.
In the event that the $1 million cap under the scheme applied to each individual client whose funds are held in a law firm's trust account, the law firm would be liable to account to a client for trust funds exceeding the $1 million cap only if the loss occurred as a result of the firm's own act, neglect or default, or want of ordinary prudence or breach of accepted standard of care, and not as a result of the act, neglect or default of the bank with whom the trust money was deposited. (See s38(1) of the Trustee Act 1956.)
Given the prospect that a client with more than $1 million in a lawyer's trust account would not be able to recover the excess amount under the government guarantee, a lawyer acting as a prudent trustee would need to consider giving advice about:
the lawyer's obligation to put the funds in a trust bank account the risk of failure of the bank holding the account the $1 million cap the possibility of reducing the risk by spreading funds between different banks the extent of the firm's professional indemnity coverage in the situation as required by rule 3.4(b) of the Rules of Conduct and Client Care for Lawyers.
Note that the information obtained by the Society to date is of a general nature, in reliance on the Treasury advice, but lawyers will need to consider the position of individual clients according to their circumstances.