On 1 January 2016, the protection limit for deposits protected under the Financial Services Compensation Scheme (FSCS) was reduced from £85,000 to £75,000. This has implications for solicitors who hold client money.
In conveyancing transactions, there are various common situations where client funds could be irrecoverable if a deposit-taking institution collapses. For example:
- The buyer client sends more than £75,000 to the solicitor's client account.
- The buyer's mortgagee sends more than £75,000 to the solicitor's client account in advance of completion.
- The buyer's solicitor sends more than £75,000 to the seller's solicitor to be held to the order of the buyer's solicitor pending completion.
- The solicitor acting for the seller receives the purchase proceeds (over £75,000), and the proceeds are kept in the client account overnight pending dispatch to the seller.
There is, however, a £1 million protection limit for certain types of temporary high balances (for up to six months), including sums held in respect of property transactions. The protection only applies to individuals.
The Law Society's practice note on deposit protection for client accounts requires solicitors holding client money to advise clients of how the compensation limits work.
The Law Society has updated its note to reflect the new limit. Paragraph 5 (Information for your client) states as follows:
“Explain that the £75,000 FSCS limit applies to the individual client, and so if they hold other personal monies themselves in the same deposit-taking institution as your client account, the limit remains £75,000 in total”.
Click here to view Law Society news: New Financial Services Compensation Scheme deposits limit (7 January 2016). http://www.lawsociety.org.uk/news/stories/new-financial-services-compensation-scheme-deposits-limit/
Link to Practice Note
- Only individuals or small companies can recover compensation.
- A company qualifies as a small company. The company must satisfy two of the following tests:
- annual turnover must not exceed £6.5 million;
- balance sheet total must be less than £3.26 million; or
- average number of employees must not exceed 50.
- It is unlikely that solicitors will be liable in negligence if client money is lost following the collapse of a deposit-taking institution, as long as solicitors have placed the money in accordance with the Solicitors' Accounts Rules. However, any final decision on this is for the courts.
- Solicitors may amend their terms of engagement to limit their liability to clients for lost funds provided that they comply with the Solicitors' Code of Conduct. However, solicitors may limit their liability, provided that such limitation is:
- not below the minimum level of cover required by the Solicitors' Indemnity Insurance Rules; and
- written and brought to the client's attention.
- Express solicitors' undertakings to pay money must be honoured even if the institution with which money was deposited has collapsed.
- Solicitors must provide their clients with information relating to deposit protection