Is it a bird? Is it a plane? No, it's an escrow account!

Great news – all we need to do is ditch the traditional client account in favour of an escrow account and misuse of client money will be a thing of the past. Hurrah! The only danger remaining will be a bump on the head from plummeting indemnity premiums and contributions to the Solicitors Regulation Authority (SRA) compensation fund. Why didn’t somebody think of this sooner? Why, indeed?

As with most things in life, it is not as simple as it first might appear. When we think of misuse of client account, I suspect we might all have an image in our heads of a nefarious practitioner transferring the contents to some offshore account on a Friday afternoon and then scuttling
off to the nearest airport. Make no mistake, this does happen. A spectacular example is the case of former solicitor Dixit Shah, who disappeared one day with millions of pounds of client money and launched a new (but ultimately unsuccessful) career as a Bollywood movie mogul.

Had Shah had to withdraw funds from an escrow account, would things have been different? Maybe the operator of the escrow account would have queried the transfer of all funds at once, but would they have been able to refuse carrying out that transaction, or a series of smaller transactions over a longer period of time? If the operator of the escrow account does have the power, or even a duty, to make enquiries about high risk transactions, then the operator will be assuming a level of responsibility which is bound to have a price tag attached.

Probate fraud

The reality of the situation is that often the misuse of client funds is not easily detectable. One prime example is a common fraud in probate matters. The dishonest solicitor invents a fictitious beneficiary and/or under-declares assets in the estate. So, £150,000 is realised, and the dishonest solicitor distributes £100,000 to four legitimate beneficiaries and prepares false estate accounts. When, a few months later, none of the beneficiaries have queried anything, the dishonest solicitor makes a payment of £30,000 to A Smith, who happens to be his or her partner, and requests a payment to the firm for the balance of £20,000. Without checking the original will and asking for evidence that the final payment of £20,000 relates to a bill that has been properly delivered, how would the escrow operator ever know the first four payments were legitimate but the last two were not? Again, any such enquiries will come with
a price tag.

And, what if things do go wrong? What if a fee earner makes an unauthorised withdrawal from the escrow account? The solicitor might say that the escrow provider did not carry out sufficient checks, and the escrow provider might say the solicitor should have exercised a greater degree of supervision over the operation of the account at their end. What is the risk of a client suffering a substantial loss and being caught between a few rocks and a couple of hard places as the solicitor, the escrow provider, the compensation fund, and the professional indemnity insurance provider deny liability? 

Mortgage transactions

This does not mean that I am entirely against the concept of using an escrow account,
and it may be that for certain work some sort of escrow arrangement is highly desirable. Mortgage lenders are keen to include the instruction that the entire purchase price should pass through client account. Most conveyancing transactions involve the advance of one mortgage and the redemption of another, so why have the mortgagees not got together to set up their own escrow facility to deal with the transfer of funds? They can satisfy themselves that the entire purchase price passed through the escrow account and pay any net sale proceeds to the solicitor.

Of course, this lets the solicitor off the hook as far as any bridging arrangements or buyer incentives go. The risk that the vendor and purchaser might be colluding to disguise the real nature of the transaction then reverts to the mortgagee. Surely that cannot be the reason they have not explored the escrow option.

If the escrow account is imposed on the profession, then it will be a case of the 99 per cent paying for the costs of policing the 1 per cent, a statistic that is true of regulation more generally. The answer does not rest with which type of bank facility you use; the answer rests with getting the 1 per cent out of the profession. 

Martina Hogg is lead compliance consultant in the Compli team at Weightmans @Weightmans