Insolvent banks and solicitors' client accounts

Following the collapse of the Bank of Credit and Commerce International, the Society has considered the question of whether a solicitor, who holds a client account at a bank which becomes insolvent, would be liable to reimburse his or her clients for the money lost.
The legal position is unclear, as there does not seem to be any definitive au thority on the point.

It can be argued that solicitors hold clients' money as trustees within the meaning of s 30 of the Trustee Act 1925, and that they would not therefore be liable to their clients in the absence of negligence.
On the other hand, solicitors have contractual duties to their clients and a court might decide that a solicitor, in common with other agents, is liable, even in the absence of dishonesty or negligence.

Again liability might depend on the circumstances in which the money is held by the solicitor.
If a solicitor is liable, the following consequences would follow:
-- the solicitors indemnity fund would cover each claim up to a maximum of £1 million (there is no cover for the solicitor's own money in office account):
-- where a claim in excess of £1 million is made, a firm would have to rely on top-up insurance cover (if any);
-- the firm would have to pay the deductible on its indemnity cover;
-- the firm would be liable to future claims loading;
-- the position may be mitigated to some extent by the existence of the deposit protection scheme, under which it seems that each client would be regarded as an individual depositor.

The maximum recoverable, however, by each depositor amounts only to 75% of the deposit, up to a maximum payment per depositor of £15,000.
Solicitors should consider their exposure to the possible risks outlined above.

Under the Solicitors Accounts Rules they are obliged to maintain their client accounts at a bank (defined as 'the Bank of England, the Post Office, in the exercise of its powers to provide banking services, or an institution authorised under the Banking Act 1987') or in a deposit account with a building society (within the meaning of the Building Societies Act 1986).
The number of banks and building societies thus permitted is large and obviously includes institutions of widely varying financial strength.

Sadly, recent events have shown that the mere fact that a particular bank is authorised under the Banking Act is not a guarantee that funds are secure.