Third-Party-Managed Accounts (TPMAs) are nothing new, usually labelled as ‘escrow accounts’ or ‘designated accounts’. They have long been used for construction, property, corporate and finance transactions and have historically been inappropriate and unjustifiable for use in comparatively lower value or higher volume transactions, where monies are only held for a relatively short period of time. Typically, TPMAs are set up on a bespoke basis and so they're often time-consuming and expensive. But with improvements in technology, these barriers are lifting, and TPMAs are gaining momentum in the legal sector and elsewhere. But, how does this impact you and your practice?
The new SRA Account Rules (SAR), provide the right for firms to use TPMAs as an alternative to holding client monies. The CLC have just closed their consultation on the new accounts rules that will also explicitly permit the use of TPMAs. CiLex, has, since its inception, provided for the use escrow accounts. The BSB has long mandated that barristers cannot directly hold client funds and had until recently their own subsidiary Barco to service their firms.
Turning in particular to the new SRA Account Rules (SARs) coming into effect on 25 November 2019. These require TPMA providers to be authorised and regulated by the Financial Conduct Authority, as an authorised payment institution or small payment institution. The SARs also make reference to what firms should do in relation to the use of TPMAs (Rule 11.1 and 11.2) in order to comply with the requirements, set out in the Code of Conduct, namely:
- Use of the account does not result in you receiving or holding the client’s money – when evaluating different providers, ensure that you review carefully their terms and conditions and ensure that the contractual arrangements between yourself, your client and the TPMA does not result in you becoming the trustee of those funds.
- You take reasonable steps to ensure, before accepting instructions, that the client is informed of and understands – you must make sure that both your engagement terms and the terms and conditions of the TPMA are clear and set out appropriately to your client the nature of the relationship between all parties. In particular, you will need to clearly set out who will be responsible for paying the TPMAs fees. These could be charged to your client as part of your legal fees or disbursements in the way Telegraphic Transfer fees are charged today or could be charged directly to the client by the TPMA.
- You must obtain regular statements and ensure that these accurately reflect all transactions on account – while interpretation is unclear, it cannot be the intention of the SRA that a firm no longer utilising a client account should keep a client ledger. Funds held with a TPMA are not considered client money and firms opting for this method, are no longer required to provide audited accounts. Our view, and the SRAs guidance on TPMAs in December 2017, requires that accurate and appropriate records are kept of TPMA transactions: for your fees, there will be invoices; for transactional funds, there will be completion statements or supporting documentation.
At Shieldpay, we now have over 50 firms using us across multiple practice areas:
- Fees on account;
- Property Transactions;
- Commercial Rent Deposits;
- PI claims management; and
- Complex cross-border corporate or commercial transactions.
Over 50 law firms and lenders have opted for Shieldpay's Third-Party-Managed Account (TPMA) solution for 5 main reasons:
- Their use of client account, does not justify the costs and burden of (i) contributing to the compensation fund; (ii) preparing yearly audited accountants report; and (iii) additional PI Insurance premiums;
- They remove the risk of SRA Accounts Rules breaches related to innocent mistakes and no longer have to deal with residual balances;
- They realise that fee earners and legal cashiers are still in control of the process, they now benefit from additional protections and improved systems;
- They want peace of mind against the threat of cyber criminals and phishing scams
- They are able to gain efficiencies in their practice and reduce the number of unbillable tasks.
This article first appeared in a special edition of the Institute For Legal Finance and Management Legal Abacus magazine published in September 2019.