Lawyers and the bank deposits guarantee scheme
[4.12.08]
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.
- if 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.)
With 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.
[17.11.08]
On 24 October the Law Society wrote to the Governor of the Reserve Bank putting a strong case for exempting lawyers' trust accounts from the $1 million cap "per depositor".
The Deed of Guarantee also provides that financial institutions fall outside the Crown guarantee. In this regard, the Deed of Guarantee includes the definition of "financial institution" as an investment adviser, to the extent that the person concerned is acting in that capacity. It appears from this that insofar as a lawyer acts as an investment adviser, the funds of the clients concerned will not have the benefit of the Crown guarantee. The Society is seeking clarification on this issue as well.
As soon as the effect of the Treasury's advice is clear the Society will send an email to all trust account supervisors alerting them to the situation.
[29.10.2008]
Details of the Reserve Bank’s deposits guarantee scheme are continuing to evolve. Early confirmation from the Reserve Bank’s hotline service that lawyers’ trust accounts would be treated the same as other bank deposits was later followed by news of a proposed $1 million cap "per depositor".
The Law Society, on behalf of lawyers, has asked the Governor of the Reserve Bank to give special consideration to the position of lawyers’ trust accounts. The Society considers there is a very strong case for exempting lawyers’ trust accounts from the coverage cap entirely. It has pointed out that:
- Lawyers are required by s110(1)(a) of the Lawyers and Conveyancers Act to place trust account funds in a bank even when, in extreme conditions, that might be considered undesirable.
- Trust funds are held on behalf of a variety of clients, with amounts held ranging from small to very large sums.
- Funds need to pass through trust accounts for a wide variety of reasons, including the settlement of large and small transactions. Not infrequently, funds are held in a trust account against the lawyers’ undertaking to pay them out on the happening of an agreed event or, in the case of a dispute, establishing who is properly entitled to them.
If that approach does not find favour, then the Society submits there is an overwhelming case for the cap to apply to individual clients whose funds are held, rather than to the lawyers’ global trust account. That, however, would be a poor alternative that would result in various difficulties, including inhibiting settlement of transactions involving more than $1 million.
Check the Treasury website for further information on the Bank Deposit Guarantee Scheme and the participating banks.