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Society's advice on banking of client funds

18 November 2008

Solicitors are not under an absolute duty to account to clients for funds deposited in accordance with the Law Society of Scotland's Accounts Rules, according to counsel's advice obtained by the Society.

In the light of the recent uncertainty about the future of banks, the Society sought the opinion of the Dean of Faculty on a range of matters.

In summary, as respects the duty of accounting, in the Dean’s view the basic duty is that of the solicitor of ordinary skill acting with ordinary care as set out in Hunter v Hanley 1955 SC 200. The contract of agency between solicitor and client is fiduciary (i.e. like that of a trustee), but in the Dean’s view that does not equate to an absolute duty to account to clients for client funds which have been deposited in accordance with the Accounts Rules. If the solicitor has actual or constructive knowledge of a material risk of failure of a particular bank, a question of negligence might arise.

In the Society’s view, actual or constructive knowledge of a material risk of failure means such knowledge of a specific and material risk for a bank. Mere knowledge of speculation in the media or on the internet would be unlikely to amount to actual or constructive knowledge.

In response to the suggestion that the Society’s Accounts Rules, and in particular rule 4(3)(b), create an obligation to guarantee clients’ funds, the Dean confirmed that the rules do not create such an obligation. The wording in rule 4(3)(b) “nothing herein contained shall relieve a solicitor of his responsibilities” must refer to responsibilities to be found elsewhere and not within the Accounts Rules.

Terms of business

Having regard to the Dean's advice, the Society's Professional Practice Committee has agreed that further guidance on terms of business is appropriate. Solicitors should advise clients in their standard terms of business of the identity of the bank or banks in which any funds held for the client will be deposited. The terms of business should further say that if clients wish their funds to be deposited in a different bank or banks they will need to give the solicitors specific instructions to that effect.

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