Clarity over advance legal fees?

The rules under which the Solicitors’ Regulation Authority (‘SRA’) monitor the handling of client money by legal firms changed in November 2019, and one issue resulting from those changes that has caused a great deal of concern is how to account for money received for legal services from clients in advance of the work being performed.

To set the scene

The SRA simplified the client money rules to be more in line with their general policy of outcome-focused regulation, meaning that the rules became significantly less prescriptive. This has in turn, led to more interpretation in how the principles are applied. In particular, where a solicitor requests funds from clients in advance of work being done a question that is often raised is ‘is this client money or the solicitor’s money?’ Furthermore, ‘does the solicitor need to raise a bill at this point in order to take the money from their client account?’ The Solicitors’ Regulation Authority have stated in response to this that they would consider that systematic billing for fees and disbursements not incurred (and the transfer of the money from client account in settlement of that bill) would be regarded as ‘a serious factor’.

Payments in advance

Of course, Solicitors will want to receive money in advance for a number of reasons – to fund disbursements or deposits on property transactions for example, but these funds will need to be kept separate from the Solicitor’s own money to ensure transparency and to comply with the client money rules. In most cases, Solicitors send a bill to their clients after the completion of the matter on which they are instructed, or as an interim fee where appropriate. However, what is becoming more common is that solicitors are now requesting payment of their costs in advance of the work being done. This may be to ease cash-flow issues or to avoid problems in collecting the debt after their work. The SRA are clear in that they expect solicitors who do so to be mindful of the reasons why they are doing it and to properly safeguard these funds. Just because a bill has been raised does not mean the solicitor has the right to treat the money as their own.

Clarity of client money

In general, money received as an advance where no bill has been raised is treated as client money, and solicitors may reimburse themselves from these funds for properly incurred expenses. However, where a bill for fees is raised prior to any work being done clouds the issue. Normally, money received in respect of a bill properly rendered is the solicitors money. But is this the case where the work has not been performed? The SRA do not make a clear conclusion – they simply highlight a number of risks that may exist if solicitors choose to treat it as their own money and leave the outcome to be determined by the solicitor and the Reporting Accountant. It seems to me that, as with disbursements yet to be incurred, money received in respect of work not yet performed should, on the grounds of prudence, be treated as client money. This may appear to be in conflict with the basic rules, but I would argue that in the case of advance billing, the bill is not properly due and falls within the definition of client money. The guidance by the SRA is not prescriptive and does not offer a clear process. However, underlying it all are the principles of honesty and integrity, and the SRA does say that ‘we would expect…that the bill sets out only those fees and disbursements that have been incurred’. It also says that solicitors should not bill in advance disbursements for which the client is liable (e.g. SDLT) in order to profit from better cash-flow. In these difficult times, it may be tempting for businesses to bill as much up-front as they can to bolster their own financial position. Both solicitors and their clients should be aware that the SRA will frown upon such situations. If you want more clarity, get in touch with us to talk this through.