Tips for more efficient trust account management
Reviewing lawyers’ trust accounts is one of the main tasks carried out by the NZLS inspectors.
As part of the Law Society’s regulatory team, the inspectors carry out reviews with three main aims:
- Protecting client funds held in a trust account;
- Protecting the public at large – not just people who have funds in trust accounts, but the knowledge that lawyers are held to a high standard, that they are held to account; and
- Protecting the reputation of lawyers, by ensuring the Law Society is monitoring client funds.
Most of the time, the inspectors find that lawyers and law firms are generally complying with the relevant legislation and regulations. However, the Inspectorate has indentified some common areas that lawyers can address to improve their trust accounting practices.
Some of these matters involve breaches of the Lawyers and Conveyancers Act 2006 (LCA), the Lawyers and Conveyancers Act (Trust Account) Regulations 2008 (Regulations) or the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008. Others are more matters of good practice.
Reporting to clients
A practice holding funds for a client must send the client a complete and understandable statement about those funds.
The statement must advise all transactions in the client’s account and the balance of the account. It must also identify funds held on Interest Bearing Deposit (IBD).
A “complete and understandable” statement must be sent at the end of a matter, before completion of a transaction, or within every 12 months if the matter takes longer than one year (see reg 12(7) of the Regulations).
Just sending a resident withholding tax certificate regarding interest earned is unlikely to meet this requirement. Reporting also assists firms to keep in touch with clients.
Firms should have a formal process in place to ensure clients with continuing balances are sent annual reports.
A common practice is to review both the trust account and the IBD in April each year and issue an annual statement simultaneously with the tax certificates received from the bank.
Where a lawyer is a sole trustee or appointed donee under a Power of Attorney, the Law Society recommends that you try to find an independent party to report to even if it is another director or partner of the firm. For sole practitioners, the Law Society suggests that this could be their s 44 attorney or alternate.
If the client has diminished mental capacity, you may wish to consider reporting to another family member when that is appropriate.
Open and transparent billing
Inspectors sometimes find firms charging an administration fee on third party disbursements. For example, a firm may charge $100 on an invoice under the heading “disbursements” for the registration of a mortgage which costs the firm $80.
Charging a fee in this way does not comply with rules 3.4, 9 and 11.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (Rules).
A lawyer has been censured by the New Zealand Lawyers and Conveyancers Disciplinary Tribunal for charging in this way (see Canterbury Westland Standards Committee v P Currie  NZLCDT 15).
The Law Society’s position is that disbursements must be charged at cost. An article discussing this matter is available on the Law Society website in the Practice Resources section.
If a firm intends to charge a fee for these overheads, then this should be explained in its terms and conditions of engagement. The fee could be described as an “office service charge” or something similar. Additional fees cannot be classified as disbursements. An agency fee may only be charged when an agency exists and supported by an invoice from this agent.
Dormant or long-standing credit balances (good practice)
Another common risk frequently found is long-standing balances in a client ledger with no movement sometimes over many years.
Inspectors have found a variety of reasons for these credit balances. They may be due to differences between estimates and actuals in the trust ledger (for example over-estimating the funds required for rates or searches), additional interest payments, or undeducted fees or disbursements. Alternatively, the balance may mean there are inadequate file closure procedures and funds are owed to a client.
If the firm does not have current client instructions, or an open matter, the funds must be returned to the client. They should not remain in the trust account.
Under the LCA, Regulations and case law a firm may not transfer client credit balances into an account of the firm unless there is proper authority and reason to do so.
Neither can the firm create a pro forma invoice for office administration fees to “clean up” or “write off” the small balance (see s 110 of the LCA and regs 9 and 12 of the Regulations).
A relevant decision of the Lawyers and Conveyancers Disciplinary Tribunal is Auckland Standards Committee 5 of the New Zealand Law Society v Holmes  NZLCDT 31. Judge Clarkson stated at :
“In the event any credit balance is held for a client, whether small or large, there must be an accounting to the client. Of course, a fee can be drawn, but only in the event that it is properly due in terms of the retainer first established. The account (and fee note, if any) must be delivered to the client.”
If the firm has lost contact with the client, it must take reasonable steps to find the client. Reasonable steps include contacting the previous address/phone number/email, and searching the electoral roll. This must be done over an extended period of time. If the client cannot be found, the firm may consider sending the funds to Inland Revenue as “unclaimed money” as allowed by s 337of the LCA. For further information as to when this may be appropriate, please contact the Inspectorate.
Overdrawing client funds
Trust bank accounts and individual trust ledgers must not be overdrawn (see regulation 6 of the Regulations).
Overdrawing a client ledger or the firm’s interest in trust ledger (FIT) means a firm is allowing funds to be unlawfully “borrowed” from another client.
The Inspectors often find the FIT was overdrawn during a month and not corrected until after the end of the month – whether because of error, bank error or poor internal processes.
Firms need to have a process to make sure funds are not paid out of the trust account unless there is enough money in the client’s ledger or the FIT to cover the transaction and must check this on a transaction by transaction basis.
Should an error occur, the Trust Account Administrator should advise the Trust Account Supervisor immediately, and the matter must be rectified promptly.
Mistakes happen. Not noticing that one has happened and therefore not rectifying it is what causes risks to clients.
Journals not authorised or properly narrated
Journals move money between clients’ ledgers and change a client’s entitlement to trust funds. Journals should have the same level of control as external payments, such as having the supporting client authority.
Journals require clear narrations, advising where the funds have come from, where they are going to and a detailed reason as to why the funds are being moved. Also, client instructions must be on file authorising the payment, including between related entities. In the same way, it is good practice that only a partner or director may authorise the movement of funds between clients. Such movement should then be reviewed by the Trust Account Supervisor at the end of the month. (See regs 11(4), 12(6)(b) and (d) of the Regulations).
Supervising trust accounts (good practice)
The Trust Account Supervisor (TAS) needs to be “hands on” and involved.
The trust account records should be reviewed frequently. Once a month is not enough. The sooner errors and issues are identified and corrected the easier end-of-month reconciliation and monthly certification to the Law Society will be.
The Law Society has a checklist contained in the Lawyers Trust Account Guidelines outlining the minimum records that should be reviewed at month’s end. The Guidelines can be found on the website. To evidence that a review did occur, the TAS should sign and date each page. (See reg 16(4)(c).
Additionally, the Trust Account Supervisors Manual has step-by-step elements to consider at pages 69-71 before signing any reg 17 certification.
Monthly and quarterly trust account certificates
Every Trust Account Supervisor must provide certification to the Law Society that the trust account has followed and adhered to certain requirements.
The certificate confirms that the trust account ledger was correctly reconciled with the corresponding trust accounts, that the trust account records were a complete and accurate record of transactions during the month, and that each client’s position is correctly shown.
Certificates must be submitted by the due date and care must be taken to submit a true and accurate certificate. For example, if the firm has not reconciled the trust account for any reason, or an error has occurred or any of the rules or regulations have not been met during the month, the Trust Account Supervisor must answer “no” to the applicable statement in the certificate and provide an explanation.
The Law Society has no discretion to waive the due date. Due dates are published for the current calendar year on the Law Society website in the Regulatory Requirements section.
If the Trust Account Supervisor cannot certify by the due date, alternative arrangements may be able to be made. For assistance please email firstname.lastname@example.org
Stale trust account cheques (good practice)
Firms that make payments to clients or on a client’s behalf using trust account cheques need to have a process for dealing with issued cheques that have not been presented.
An unpresented cheque becomes stale after six months. Banks are no longer required to honour the cheque.
Also, unpresented cheques are risk items in the end-of-month bank reconciliation.
Where an unpresented cheque has gone stale, the firm should contact the client saying the cheque will be cancelled. The payment should then be reversed in the client ledger.
The Inspectorate recommends the client payee details are obtained and payment is made electronically.
If you have lost contact with the client, the payment should be reversed in the client ledger and the steps detailed in the section above should be taken before sending funds to Inland Revenue or the Public Trust.
Personal transactions through the trust account
Regulation 8 prohibits personal transactions for any staff or family members of staff going through the trust account. The only exception is when a staff member or their family are clients of the firm for property or investment transactions. In those instances, they must be treated the same as any other client (including having a matter file, providing client care information and having authorisation for any transaction).
The rule is intended to prevent lawyers from using their trust accounts as an extension of their personal bank accounts, as that could cause a risk of personal funds being mixed with other clients’ funds.
Should a firm hold any ongoing trust accounts for staff or family, then these accounts should be included in the end-of-month review process.
Client ledger and IBD name variances
Inspectors often find differences in client names between the trust account client ledger and the IBD bank account. Such differences can cause problems in distinguishing the actual person(s) or entity(ies) that are legally entitled to the funds, the interest, and RWT tax credits. Implementing a process where the client is correctly identified, and client names are confirmed between the ledger and the bank statement is highly recommended.
Separation of duties (good practice)
Separation of duties, wherever possible, is important for protecting client funds.
The Guidelines advise that a director/partner/sole practitioner should only give authority to staff to release electronic funds in urgent situations and only if robust procedures are in place to support these situations. Good practice is to allow only a director/partner/sole practitioner to release the trust account funds.
Additionally, the person entering the data into both the trust accounting system and banking system should, where possible, not be the person who both authorises the transactions and completes the bank reconciliations.
Documenting processes (good practice)
While most firms are good, the Inspectors sometimes find that there are no documented procedures around the administration of the trust account.
This is a risk to both the firm and the client, particularly if the regular Trust Account Administrator or Trust Account Supervisor is changed or is absent from the firm for any reason.
All firms should document their procedures so that they are able to operate seamlessly at all times.
With the pending inclusion of lawyers in phase 2 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 and FATCA and AEOI requirements, the Inspectorate advises firms to start documenting processes and procedures around customer due diligence, including client identity verification.
Payee bank account verification (good practice)
Often payee bank account details are obtained in the form of an email, over the phone, or a handwritten note by the client, with a handwritten note retained on the file.
Receiving payee details in these ways provides the potential for a series of problems to arise, including transcription errors or scam attacks online. The practice creates unnecessary risks.
Best evidence of payee details is a bank record. Bank records include a bank deposit slip, a copy of a bank statement or a print out from an ATM. These documents should be received from the payee up front and in person if possible.
If the only option is to receive payee details by email, firms should follow this up with a phone call to the client verifying that the client sent the email and that the account details are correct. If details are taken over the phone, the Inspectorate encourages lawyers to follow this up by writing to the client (email or letter), asking them to respond confirming the details. Information regarding scams is available on the Law Society website.
The above are just some of the common concerns that Inspectors encounter on a regular basis when they visit firms.
The Law Society would like to see these issues occurring less often.
The Inspectorate team is always willing to help and should a firm have any questions please contact either national office or your local inspector.
Lisa Attrill is the New Zealand Law Society’s Inspectorate Manager.
Last updated on the 2nd June 2017