Joint accounts and third-party managed accounts - Understanding third-party managed accounts

Learning Outcomes

This article outlines the specific rules and practical implications surrounding the use of joint accounts and third-party managed accounts (TPMAs) within legal practice. It details the limited application of the SRA Accounts Rules to these account types and highlights the solicitor's ongoing responsibilities. After studying this article, you should understand the key characteristics, regulatory requirements, and client protection aspects relevant to joint accounts and TPMAs, enabling you to apply this knowledge to SQE1 assessment scenarios.

SQE1 Syllabus

For SQE1, a working knowledge of how client money is handled outside the firm's main client account is necessary. This includes understanding the specific provisions under the SRA Accounts Rules 2019 (the Rules) relating to joint accounts and third-party managed accounts. You will need to be able to identify the circumstances in which these accounts might be used and the different compliance obligations compared to standard client accounts.

As you work through this article, remember to pay particular attention in your revision to:

• the definition and operation of joint accounts under Rule 9
• the requirements when operating a client’s own account as signatory under Rule 10
• the requirements for using third-party managed accounts (TPMAs) under Rule 11
• the limited application of the main SRA Accounts Rules to these types of accounts
• the solicitor's continuing duty to safeguard client money and act in the client's best interests even when using these alternative accounts.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which SRA Accounts Rule primarily governs the use of joint accounts held by a solicitor with a client or third party?
   1. Rule 2
   2. Rule 5
   3. Rule 9
   4. Rule 11
2. A solicitor operates a client's personal bank account under a Lasting Power of Attorney. Which of the following SRA Accounts Rules requirements applies? (Select all that apply)
   1. Paying the money into a client account promptly.
   2. Reconciling the account statements at least every five weeks.
   3. Keeping a central record of bills relating to the operation of the account.
   4. Obtaining an annual accountant's report covering the account.
3. Before using a Third-Party Managed Account (TPMA), what must a firm primarily ensure regarding the client?
   1. That the client has sufficient funds to cover the TPMA provider's fees.
   2. That the client understands the arrangement and gives informed consent in writing.
   3. That the client has separate legal advice on the TPMA agreement.
   4. That the TPMA provider is based in England and Wales.

Introduction

While the core SRA Accounts Rules focus heavily on the operation of a firm's own client bank account, there are specific situations where money belonging to clients or third parties is handled differently. The Rules acknowledge these situations and provide modified requirements for joint accounts (Rule 9), the operation of a client’s own account by the solicitor as signatory (Rule 10), and the use of third-party managed accounts (TPMAs) (Rule 11). Understanding these variations is essential for ensuring compliance and safeguarding funds, even when money does not pass through the firm’s main client account.

Joint Accounts (Rule 9)

A joint account under the SRA Accounts Rules is an account held in the joint names of the solicitor or firm and a client or other third party. A common example is where a solicitor acts as an executor alongside a non-solicitor executor (such as a family member) for a deceased's estate, and they open a joint bank account to manage the estate's funds.

Because the account is not solely controlled by the firm, it is not treated as a 'client account' for the full application of the Rules. Rule 9.1 specifies that only limited provisions of the Rules apply, specifically:

• Rule 8.2: Obtaining bank statements at least every five weeks.
• Rule 8.4: Keeping a readily accessible central record of bills or written notifications of costs relating to the matter.
• Rule 29.17(b)(ii) (from the old SRA Accounts Rules 2011, principle implicitly retained): Keeping the statements for at least six years.

Key Term: Joint Account
An account held at a bank or building society in the joint names of a solicitor/firm and a client or third party, to which limited SRA Accounts Rules apply (primarily Rule 9).

Although the full Rules regarding client accounts (like detailed ledger recording under Rule 8.1 or withdrawal restrictions under Rule 5) do not apply, the solicitor still owes overarching professional duties. SRA Principle 7 (acting in the best interests of each client) and the SRA Code of Conduct (Paragraph 4.2 for solicitors / 5.2 for firms – safeguarding client money and assets) remain of utmost importance. This means the solicitor must take reasonable steps to protect the money in the joint account, for example, by ensuring the account mandate requires joint signatures for withdrawals.

Worked Example 1.1

Farah, a solicitor, is appointed as a co-executor of Mr Khan's estate alongside Mr Khan's daughter, Aisha (who is not a solicitor). They decide to open a joint bank account in both their names to receive estate funds and pay liabilities. Farah's firm does not handle the money through its own client account. What are Farah's primary obligations under the SRA Accounts Rules regarding this joint account?

Answer: Under Rule 9, Farah must ensure she obtains bank statements for the joint account at least every five weeks (Rule 8.2) and that records of any bills related to the estate administration are kept (Rule 8.4). Although the full client account rules do not apply, she still has professional duties to safeguard the estate money and act in the best interests of the estate beneficiaries. She should consider practical safeguards like requiring joint signatures for withdrawals.

Operating a Client's Own Account (Rule 10)

Sometimes a solicitor or authorised employee might operate a client's personal bank account as a signatory. This typically occurs under a power of attorney (e.g., Lasting Power of Attorney for property and financial affairs) or when appointed as a deputy by the Court of Protection for someone lacking mental capacity.

Key Term: Client's Own Account
A client's personal bank or building society account which a solicitor or firm operates as a signatory (e.g., under a power of attorney or as a Court of Protection deputy), subject to specific requirements under SRA Accounts Rule 10.

As the money is in the client's own account and not held or received by the firm, it isn't technically 'client money' under the main definition, and the account isn't a 'client account'. Therefore, the full Accounts Rules do not apply. However, Rule 10.1 imposes specific obligations on the solicitor/firm operating the account:

• Rule 8.2: Obtaining bank statements at least every five weeks.
• Rule 8.3: Performing reconciliations at least every five weeks (comparing bank statements to the firm's records of transactions made).
• Rule 8.4: Keeping a readily accessible central record of bills or written notifications of costs associated with operating the account.

The SRA guidance acknowledges that obtaining statements and performing reconciliations every five weeks might not always be practicable (e.g., if the bank only issues quarterly statements). In such cases, the firm will not be in breach provided it takes reasonable steps to ensure the client's money is safe and records the steps taken.

Exam Warning

Do not confuse operating a client's own account (Rule 10) with holding client money in a separate designated client account (which is a client account subject to the full Rules, except perhaps for the interest calculation method). The key difference is ownership and control of the account itself.

Third-Party Managed Accounts (TPMAs) (Rule 11)

Rule 11 permits firms, as an alternative to using their own client account, to enter into arrangements with a client for client money related to that client's matter to be held and managed by an independent third party.

Key Term: Third-Party Managed Account (TPMA)
An account held and operated by a third-party payment service provider (regulated by the Financial Conduct Authority), not the law firm, to hold money relating to a client's matter under an agreement between the firm, the client, and the provider (Rule 11).

Money held in a TPMA is not held or received by the law firm and therefore falls outside the definition of client money and the main SRA Accounts Rules. This can reduce the firm's administrative burden (e.g., no need for reconciliations or potentially accountants' reports relating to that money).

However, using a TPMA imposes specific obligations on the firm under Rule 11:

• The firm must not itself receive or handle the money (Rule 11.1(a)).
• The firm must take reasonable steps before accepting instructions to ensure the client understands the arrangement, including:
  • The contractual terms with the TPMA provider.
  • How TPMA fees will be paid and by whom.
  • The client's right to terminate the TPMA agreement and dispute payment requests (Rule 11.1(b)).
• The firm must obtain regular statements from the TPMA provider and check they accurately reflect transactions (Rule 11.2).
• The firm must notify the SRA when it first uses a TPMA provider.

Critically, the firm still has overarching duties under the SRA Principles (e.g., acting in the client's best interests - Principle 7) and the Code of Conduct (safeguarding client money and assets - para 4.2/5.2). This means the firm must conduct due diligence to ensure the TPMA provider is suitable, regulated (usually by the FCA), and that the arrangement is appropriate for the client and the specific matter. The SRA guidance emphasizes that the TPMA must not simply be used as a banking facility unconnected to the legal services being provided.

Worked Example 1.2

A law firm specializing in high-volume, low-value debt recovery considers using a TPMA provider to handle the receipt of collected debts from debtors and payment out to their creditor clients, aiming to reduce administrative costs associated with running a traditional client account. What must the firm do before implementing this system?

Answer: Before using the TPMA, the firm must (under Rule 11 and associated guidance):

1. Conduct due diligence on the TPMA provider to ensure it is FCA-regulated and suitable.
2. Obtain informed, written consent from each client before using the TPMA for their matter, ensuring clients understand the terms, fees, termination rights, and regulatory differences compared to a firm's client account.
3. Notify the SRA that it is using a TPMA provider (when first doing so).
4. Ensure the arrangement is genuinely linked to the debt recovery service and not just providing a banking facility.
5. Establish internal systems to obtain and check regular statements from the TPMA provider (Rule 11.2).

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Joint accounts (Rule 9) are held with clients/third parties; only limited SRA Accounts Rules apply (mainly obtaining statements and recording bills).
• Operating a client's own account (Rule 10) as signatory (e.g., under PoA) also has limited Rules application (statements, reconciliations, bills).
• Third-Party Managed Accounts (TPMAs) (Rule 11) involve an external provider holding funds; this money is not client money held by the firm.
• Using TPMAs requires prior informed client consent, due diligence on the provider, and SRA notification.
• Firms using TPMAs must still obtain and check statements from the provider.
• Overarching duties to safeguard client money and act in the client's best interests apply even when using these alternative accounts.
• These accounts must not be used merely to provide banking facilities unconnected to regulated legal services.

Key Terms and Concepts

• Joint Account
• Client's Own Account
• Third-Party Managed Account (TPMA)