Donation of Client Balances - Getting the Process Right - By SPONSOR PKF Francis Clark LLP

Donation of Client Balances - Getting the Process Right - By SPONSOR PKF Francis Clark LLP

For a number of years now, the SRA Accounts Rules have permitted firms to donate residual client balances of less than £500 (historically £50) to charity without the need for specific SRA approval. As contained with SRA Accounts Rule 20.2.

 

We have however seen a surprising continued tendency for firms to assume that client fund balances of less than £500 can automatically be given to charity. However it is important firms remember the precise application of the rules when this can apply.

 

The Rules and Processes

 

Firstly it is important to highlight that SRA Accounts Rule 14.3 explains that any residual client balance, regardless of its size must be returned to the client.

 

As such in the first instance, firm’s should have solid controls to ensure residual client balances do not arise. However in practice inevitably situations occur where residual client funds do arise from time to time.

 

If the client is no longer traceable, attempts have been made to return the residual balance and the cost of tracing the rightful owner is deemed excessive in relation to the amount held, it can then be donated to charity if less than £500, ensuring the requirements of rule 20.2 are followed.

 

The key point here is that the firm needs to show the client is untraceable and that they have complied with the above procedures. It’s not allowable to simply donate the money to charity because it is an old or a small balance.

Historically where the threshold for donating client balances for untraceable clients was less than £50, in most situations the expense required to trace the client could be easily justified as being excessive.

 

However as this threshold is now £500, firms need to carefully consider what would be reasonable costs to incur by taking into account areas such as:

  • the age of the residual balance;
  • the amount held;
  • the client details available in respect of a balance and
  • the costs associated with a particular tracing method

In terms of tracing the client the SRA have issued guidelines on various methods to trace clients, such as - reviewing the client file, internet searches, directory enquiries, Electoral Register, DWP services, Companies House, newspaper or tracing agent.

 

One very key point to highlight in the above, in terms of assessing if the costs of ascertaining the proper destination to return them to the client are excessive, is that it is not permitted for a firm to factor in its own time costs in locating / tracing the client to return the funds.

 

However the firm may be able to recover any reasonable out of pocket expenses such as search agent’s fees from the residual client balance.

 

For any residual client balances greater than £500 an application needs to be made to the SRA for approval to donate such balances in accordance with SRA Accounts Rule 20.1(k)

 

Record Keeping Requirements

 

Once firms are satisfied they have adhered to the above requirements and subsequently proceed to donate the client funds to charity (Which must be a registered charity and provides and indemnity), the process doesn’t stop there.

Practices also need to ensure appropriate records are keep in the form of a central register and supporting documents with the following information:

  • Detailing the name of the client, etc
  • The amount donated,
  • Date of the payment,
  • Details of the recipient charity and receipt of payment,
  • Recording the steps taken to establish the identity of the owner of the funds,
  • Recording the attempts to trace the owner or the rationale why the costs were deemed excessive to do so

Guidance

 

It’s crucial for law firms to have strong control systems and policies in this area.

Old client balances themselves indicate poor controls of file management in some firms and provide an increased opportunity for fraud in the wrong environment.

 

The following guidelines may be useful to firms in considering their control systems for returning small residual balances to clients.

  • For small residual client balances it is permissible that postage stamps up to the value of £4 can be sent to the client to return balances when there is no longer any commercial reason to hold the funds. This is providing the practice has no reason to believe the client has relocated from their contact address.
  • It is also accepted that in some circumstances for small residual balances it may not be practical to return amounts to clients. It is therefore acceptable that if the client approves for the small amounts not to be returned it can be donated to charity. For such circumstances written evidence must be obtained however it may be accepted for very small balances a file note of a telephone / meeting conversation with the client will suffice.

This publication is produced by Francis Clark LLP for information only and is not intended to constitute professional advice.

 

Specific professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of its issue), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.

 

Francis Clark

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