The new SRA Accounts Rules allows law firms to use TPMAs as an alternative to holding client monies. Geoff Dunnett, professional services director of Shieldpay, explains the practical points that firms need to know. (24 February 2020)
Third-Party-Managed Accounts (TPMAs) are nothing new. They are a new version of what are commonly known as ‘escrow accounts’ or ‘designated accounts’. These have long been used for construction, property, corporate and finance transactions.
In the past these devices were expensive and time-consuming to set up, which made them unsuitable for use in lower value transactions, or transactions where monies were only held for a short period of time.
Technology has now changed that.
Regulators all now allow TPMAs
As of 25 November last year, the new SRA Account Rules provide the right for firms to use TPMAs as an alternative to holding client monies. The CLC have closed their consultation on the new accounts rules that will also explicitly permit the use of TPMAs. CiLex has, since its inception, provided for the use of escrow accounts. Meanwhile the BSB has long mandated that barristers cannot directly hold client funds and had until recently their own subsidiary Barco to service chambers.
Complying with the new SRA rules
The rules require TPMA providers to be authorised and regulated by the Financial Conduct Authority, as an authorised payment institution or small payment institution.
Rules 11.1 and 11.2 set out what firms need to do:
- Use of the account must not result in you receiving or holding the client’s money. So, when evaluating different providers, check their T&Cs to ensure that the contractual arrangements between yourself, your client and the TPMA does not result in you becoming the trustee of those funds.
- Before accepting instructions, take reasonable steps to ensure that the client properly understands the arrangement. Both your engagement terms and the T&Cs of the TPMA must be clear, explaining the nature of the relationship between all parties. In particular, state who will be responsible for paying the TPMA fees and that the client can dispute payment requests that have been made. (The fees could be charged to your client as part of your legal fees or disbursements in the way Telegraphic Transfer fees are charged today, or could be charged directly to the client by the TPMA.)
- You must obtain regular statements and ensure that these accurately reflect all transactions on account. Funds held with a TPMA are not considered client money, so firms opting for this method are no longer required to obtain an accountant’s report.
- Our view, and the SRA's guidance on TPMAs first issued in December 2017, is that accurate and appropriate records must be kept of TPMA transactions: for your fees, there will be invoices; for transactional funds, there will be completion statements or supporting documentation.
Five reasons to use TPMAs
TPMAs are already used in various situations. For example, fees on account, property transactions, commercial rent deposits, PI claims management, and of course complex deals such as cross-border corporate or commercial transactions.
Here are five of the reasons that lawyers give for using them:
1. Their firm’s use of a client account does not justify the costs of contributing to the compensation fund, preparing a yearly audited accountants report, and the additional PI insurance premiums.
2. TPMAs remove the risk of SRA Accounts Rules breaches related to innocent mistakes (eg Rule 3.3, acting as a banker) and eliminates the need to deal with residual balances.
3. TPMAs keep the fee-earners and legal cashiers in control of the process, while providing additional protections and improved systems.
4. TPMAs provide peace of mind when it comes to the threat of cyber criminals and phishing scams.
5. Their firm is able to gain efficiencies that reduce the number of unbillable hours.
Conveyancing offers a good illustration of these benefits.
The full visibility of a chain’s status and the simultaneity of transfers removes the risk that transactions at the end of a conventional chain will fail to complete.
On moving day, TPMAs can bring real-time notifications to all firms and clients that completion has happened, triggering the immediate release of the keys from the estate agent and the green light for the removal van. This is a significant improvement on client portals or apps that show the status of the transaction but are not connected to the flow of monies.
Much of the stress that has always been part-and-parcel of conveyancing can be removed — for everyone involved, including the client. No longer do cash room staff have to deal with anxious fee earners demanding updates on whether funds have moved as directed. Instead, these staff can concentrate on completing the outstanding tasks on the file.
"In a situation where a corporate transaction requires a joint account or escrow account, it is likely that the set-up process for a TPMA would be much more straight forward and be completed more quickly than with a high street bank, for example."
Rosy Rourke, legal sector director, Armstrong Watson
Dealing with Residual Client Balances
Whether these have been inherited from previous cashiers, been brought to the business through merger activity, or have simply been left to grow over a period of time, the issue of Residual Client Balances is considered by the Solicitors Regulation Authority as a serious problem. Left unattended, it will result in a material breach reportable in the Accountants Report to the regulator.
The SRA Guidelines (Rule 2.5) are clear. Client money is to be returned promptly, unless there is a proper reason to continue holding the funds.
Residual balances can suggest a lack of control within the firm’s client money management procedures, and in extreme circumstances have been an indication of fraud. They are one of the issues that your firm's COFA has to monitor and report on in the event of a breach, taking into consideration factors such as the volume of accounts, the length of time balances has remained in dormancy and the firm’s adherence to its own written policy on residual balances.
Funds held with a TPMA provider do not consist of ‘client money’ as defined under Rule 2.1. This means that the obligations under Rule 2.5, requiring to return funds promptly, do not apply to funds held with the TPMA provider and a firm would not risk making the ‘innocent mistake’ of acting as a bank and being in breach of Rule 3.3. A firm will however remain subject to both the Code of Conduct obligations of protecting clients’ assets and the T&Cs of the TPMA provider. The provider will, in turn, be subject to its regulatory obligations with the FCA.