SRA accounts rules: Avoid mismanagement of client funds

The SRA – which regulates the legal profession in the UK – issued a warning notice in March 2023 to remind legal professionals to adhere to the rules and the consequences of not doing so.

Holding client funds

A law firm can only hold its client’s funds whilst dealing with the client’s transaction where there is a legally binding connection between the client’s funds and delivery of regulated services.

According to the SRA, allowing a client account to be used as a banking facility carries with it additional money laundering risk. The SRA is issuing significant fines to solicitors who breach Rule 3.3.

Despite the most recent warning, there is still some genuine confusion within the legal industry about which client account scenarios are permissible. To help bring clarity, the SRA published illustrative case studies that are available here.

Escrow agents – an alternative solution

To avoid the risk of an unintended error, solicitors are increasingly choosing to stay independent of a client’s account by turning to dedicated escrow agents to manage the transfer of funds or assets.

An escrow agent is a trusted, neutral third-party to a transaction. It will hold clients’ funds or assets until the pre-agreed conditions have been met and it is instructed to release the funds or assets.

What to ask an escrow agent

Below are some key points to keep in mind if you are considering working with an escrow agent.

Regulation

Ask the escrow agent if they are a regulated entity as not all escrow agents are regulated. It’s important to know this before initiating the escrow process.

Regulated escrow agents have the necessary permissions to act and are subject to oversight by the UK Financial Conduct Authority, or FCA.

A prospective escrow agent can provide information on how they comply with foundational regulations such as anti-money laundering (AML) rules, know your client (KYC) guidelines, and other ways they support safety and quality, including client escrow account segregation.

ZEDRA Trust Company UK is authorised and regulated by the FCA as an Authorised Payment Institution.

Experience

Consider asking an escrow agent about its client service approach. For example, what types of communications should the client expect throughout the escrow process, and the depth of their team members’ professional experience.

ZEDRA provides escrow services for mergers & acquisitions, real estate, funds, litigation, trading of high value items, non-financial & physical assets, and commercial disputes, including civil and matrimonial settlements.

Our team is made up of a variety of trust, operational, and legal professionals with over one hundred years of combined experience.

Operational Know-How

A prospective client should also understand the administrative processes and timelines for setting up an escrow account and how the payment process works once the transaction is concluded.

The timeline aspect is especially important. Arranging for an escrow account can sometimes occur toward the end of a merger or divestiture or other complex transaction given the many competing priorities. Being able to rely on an escrow agent who has established banking relationships – and can meet tight deadlines – is critical.

ZEDRA only works with Tier 1 capital adequacy UK banking institutions to ensure safety for a client’s funds. Our relationships with Tier 1 banks enable fast account set-up whilst closely adhering to AML rules and KYC guidelines.

Payment Services

In addition to escrow accounts, solicitors are engaging escrow agents for support with payment agent or paymaster services in transactions where, historically, these would have been provided by the solicitor. The driving force behind this shift is the requirement to be in compliance with Rule 3.3 and not act as a banking facility.

ZEDRA serves as a paying agent and acts as a trusted third-party to a transaction. We can support transactions with multiple payments to UK and non-UK accounts in multiple currencies.

We can provide payment services in the context of fund transactions, real estate transactions, and sales of businesses amongst others.

Many of these are international transactions where the UK legal framework provides tried and tested security.

How ZEDRA can help

If you are a solicitor who would like to know more about how we can help ensure you are compliant with SRA Rule 3.3, or you are looking for a secure and swift payment process, our escrow agent service provides peace of mind. Contact Sue Wakefield to discuss your specific circumstances.