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Escrow Services under the Spotlight

The current focus seems to be on the use of Escrow Services by firms of solicitors, when these have been used in various financial services promotions.

Jeremy BarnettThe SRA seem to have concentrated on various 'hot topic's over the last few years, including Miners Compensation, overcharging in PI cases, failure to pay ARP [Assigned Risk Pool] premiums and Litigation Funding [Axiom].  The current focus seems to be on the use of Escrow Services by firms of solicitors, when these have been used in various financial services promotions.

Solicitors often find that they are also subject to regulation by other regulators such as the FCA in these circumstances.

The 1998 guidance note (ix) to rule 15 of the Solicitors' Accounts Rules 1998 stated:

"Solicitors may need to exercise caution if asked to provide banking facilities through a client account.  There are criminal sanctions against assisting money  launderers".

2004 Amendment

In March 2004 the note to rule 15 was revised to reflect the decision of the Solicitors Disciplinary Tribunal in Wood and Burdett. As a result, the note took in paragraph 143 of that decision - that it was not the proper part of a solicitors' everyday practice to operate a banking facility for third parties, even if they were clients. The note continued:

"Solicitors should not, therefore, provide banking facilities through a client account. Further, solicitors  are  likely  to lose the exemption under the  Financial  Services  and Markets Act 2000 if a deposit is taken in circumstances which do not form part of a solicitor's practice. It should also be borne in mind that there are criminal sanctions against assisting money launderers."

The preface to the Solicitors Accounts' Manual, 9th edition, explained that, from 17 March 2004, note (ix) to rule 15 had been updated to reflect the view of the Solicitors Disciplinary Tribunal, "that the provision of banking facilities through a client account does not form part of a solicitor's practice".

2011 Amendment

In 2011 the SRA Accounts Rules were recast. There is now a clear distinction between the rules, which are mandatory, and the guidance notes, which are not. Thus rule 2.1 states that "the guidance notes do not form part of the rules". The thrust of note (ix) to Rule 15 has now become a rule, rule 14.5. It reads:

''You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities."

The note to rule 14.5 provides that the rule reflects decisions of the Tribunal that it is not a proper part of a solicitor's everyday business or practice to operate a banking facility for third parties, whether clients or  not.

The definition of the new rule has been considered in a number of recent cases including:

  •     Patel V SRA      29.11.12   [Moore-Bick LJ and Cranston J ] [2012] EWHC 3373   (Admin)

  •     Fuglers  v SRA (2014)  [Popplewell J]   EWHC   179  (admin)   (QB)

  •     SRA v  Agombar  2015 SDT 20th January - 17th March 2015

  •     SRA v Connick  2014 SDT 10th November


Most of the cases consider whether or not there was an underlying transaction, or whether the case was in reality mere provision of banking services. Current sanctions varied from fines from £7,500 to £50,000. In Wood and Burdett [2003], Wood, who had a disciplinary record and faced other serious allegations were struck off, but Burdett was suspended for 12 months for the client account breaches.

Smart Contracts

Escrow services are also used in Information Technology, where developers lodge their source code with a trusted third party to protect the client from insolvency of the developer in years to come. This type of arrangement does not fall foul of the Solicitors Accounts Rules, as the software is not lodged in a Client Account. Solicitors must however establish that the rules against conflicts of interest are properly observed in such situations.

Posted 23 June 2015

Jeremy Barnett

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