Moving Client Trust Funds Away from Lawyers to a Third Party
This session will explore whether the fiduciary duty to safeguard client trust funds should be transferred to a third party. The panel will present various methods of safeguarding client trust funds utilized by jurisdictions including privately owned corporate third parties and centralization of trust funds in law societies. The panel will examine which methods are working, what factors are driving a need for change, what are the risks and benefits of each method, and who will bear the costs and responsibility for administering the change.
Patricia Schwartz has been Deputy Disciplinary Counsel for the Office of Disciplinary Counsel of the Supreme Court of Delaware since 2004. As Disciplinary Counsel, Patty investigates and where necessary, prosecutes attorney ethical misconduct and the unauthorized practice of law. Patty also serves on the Board of the National Organization of Bar Counsel in the U.S.
Following 17 years in civilian oversight of policing in Ireland, Brian Doherty was appointed as Chief Executive Officer of the new Legal Services Regulatory Authority in September 2017. The Legal Services Regulatory Authority is still in start-up phase but, when fully established, it will regulate the provision of legal services by legal practitioners and will also be responsible for ensuring the maintenance and improvement of standards in the provision of legal services in Ireland.
Nandi Lubbe is Certified Internal Auditor (with the IIA Global) and Professional Accountant (South Africa). She is busy with her PhD thesis on Legal Practitioner’s Trust Accounts. She is a lecturer at the Central University of Technology and a facilitator of the Law Business Finance module for the Law Society of South Africa’s Legal Education and Development division.
Why is this session of particular interest and to whom?
Jurisdictions/regulators that might be more impacted by this issue:
Jurisdictions that are considering introducing previously disallowed forms of commercial juristic entities (alternative law practice business structures), such as
- legal partnerships between barristers (prohibited from holding client trust funds) and solicitors/lawyers (permitted to hold client trust funds); or
- legal practices where lawyers and non-lawyers share the ownership, control, management and profit of the law firm.
Jurisdictions that have experienced high levels of client trust fund misappropriation committed by lawyers.
Jurisdictions that have experienced high levels of accounting and financial errors made by lawyers with regards to their duties in holding client trust funds.
Jurisdictions that are considering introducing measures to ease the administrative & practice management burden on lawyers’ practices.
Jurisdictions that are considering introducing measures to lessen the various costs for several parties related to holding client trust funds (such as insurance premiums, operational costs, regulatory cost, and audit fees) which are eventually passed to clients in the form of increased fees.
Jurisdictions that are considering providing lawyers with a choice not to hold client trust funds but still want to provide lawyers with viable options to perform services for which client trust fund accounts were traditionally require.
‘Live’ issues and factors are contributing to making this a ‘hot topic’?:
England & Wales: The shutdown of Barco, the Bar Council of England and Wales’s third-party escrow service, as announced in August 2018, based on evaluations of its financial feasibility and specific ethically compliant commercial providers entering the market.
Ireland: The Legal Services Regulatory Authority of Ireland (LSRA) is exploring the availability and viability of escrow payment services/third party managed accounts in Ireland. The inquiry is taking place due to the newly permitted legal partnerships under the Legal Services Regulation Act 2015 between barristers (who are prohibited from holding client trust funds) and solicitors (who are permitted to hold client trust funds). The prohibition of holding client trust funds applicable to barristers extends to such legal partnership and the LSRA would like to provide these partnerships with an alternative to holding no client trust funds at all.
Various jurisdictions (for example others England and Wales, New Zealand, Australia, Singapore and South Africa) providing lawyers and/or barristers the option to choose not to hold client trust funds, without wanting to limit the type of undertakings the lawyer and/or barrister can take part in (e.g. conveyancing transactions).
Jurisdictions that are experiencing relatively high levels of client trust fund misappropriation committed by lawyers, their clerks or employees (e.g. South Africa).
Noteworthy case studies:
England and Wales:
- Barco – The Bar Council of England and Wales’s third-party escrow service was established in 2013 and announced its closure in August 2018. Upon its establishment no other third party escrow service providers existed to cater for barristers, conducting direct access work (thus not under the instruction of solicitors) to hold client trust funds on their behalf. Barco announced its shutdown based on evaluations of its financial feasibility and specific ethically compliant commercial providers entering the market.
- Transpact and Shieldpay: UK based, private limited companies which are authorised and regulated by the Financial Conduct Authority (FCA) under the Payment Services Regulations 2017, and registered with Her Majesty’s Revenue & Customs (HMRC) as a Money Service Businesses. They act as middle-men to hold funds safely until both parties involved in a transaction are satisfied with the transaction.
Singapore: As an alternative to holding client trust funds in conveyancing transactions and similar arrangements, lawyers can opt to use the Singapore Academy of Law (SAL), which is a statutory body, acting as an escrow agency.
France: The CARPA (Caisses des Règlements Pécuniaires des Avocats /Lawyers Financial Settlement Fund): All funds received by lawyers with regards to their professional activities should be deposited in a special independent bank account, regulated and managed by the CARPA. Each local Bar association (of which there are more than 180) has its own CARPA. Lawyers must be able to justify all sums that are deposited – both the origin of the funds and their destination. CARPA thus allows for checks against money laundering compliance.
What particularly do you hope to explore in this session?
This session will explore whether it is feasible to transfer the fiduciary duty to safeguard client trust funds should from the lawyer to a third-party.
The panel will discuss cases where efforts towards such change have been made. The various structural approaches and methods of safeguarding client trust funds utilized by these jurisdictions, including privately owned corporate third parties and centralization of trust funds in law societies, will also be discussed. This includes who bears the costs and responsibility for administering the change, the authority the regulator have over these funds, the reporting requirements to the regulator about these funds, who receives the benefit of the interest on these funds and how it may be used. The panel will further examine the motivations and benefits to various stakeholders driving the need for change, the challenges and remaining risks during and after change, and which methods are working. Alternatives to moving transferring the fiduciary duty to safeguard client trust funds from lawyers to third parties will also be considered.
What do you hope to achieve with this session?
- Increased understanding of alternatives to the traditional practice of lawyers holding client trust funds that are currently available.
- Lively debate on the feasibility of alternatives in specific jurisdictions.
What is the setting of your session?
Presentation(s) followed by panel discussion. Time will also be set aside for questions and comments from the attendees.
Any useful documents/background reading for context?
Alternatives to handling client money. June 2015. A briefing paper compiled by the legal services regulators of England and Wales.