Guidance on Prohibition on Handling of Client Money

Guidance on prohibition on handling of client money

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1. This guidance addresses an arrangement which we understand is not uncommon (particularly in direct access work) by which a barrister charges the client a fixed fee (payable up front) for work, accompanied by an undertaking by that barrister to that client to pay to the client a sum determined by the excess (if any) of that fixed fee over what would have been charged at the end of the work on a time-basis. [1]

2. The intention of those who utilise this arrangement is clearly to obtain the practical security of having a payment in advance on account for fees, while seeking to avoid the Code's prohibition on barristers holding "client money".

3. Unless very carefully handled and documented, this practice runs a real risk of contravening the prohibition on barristers holding client money. This guidance, while not purporting to offer legal advice to barristers, suggests matters which barristers who wish to utilise this arrangement bear in mind in order to mitigate the risk of them being in breach of the client money prohibition.

Code provisions

4. The prohibition on barristers holding client money is entrenched in the Code.

5. Paragraph 407 of the Code provides that:

"A self-employed barrister must not receive or handle client money securities or other assets other than by receiving payment of remuneration".

6. Paragraph 505 provides that:

"An employed barrister must not receive or handle client money securities or other assets other than by receiving payment of remuneration or where the money or other asset belongs to his employer".

7. Paragraph 507 provides that:

"A barrister who is employed by a Recognised Body but is not a manager of that body must not receive or handle client money securities or other assets other than by receiving payment of remuneration or where the money or other asset belongs to that body".

8. The Written Standards for the Conduct of Professional Work, General Standards, paragraph 2.1 provides that:

"... A barrister ... does not carry out the management, administration or general conduct of litigation nor the receipt or handling of clients' money".

9. The Public Access Rules do not make any express mention of holding client money.

10. Subject to the foregoing, the Code allows significant flexibility in the manner in which a barrister charges for his or her services.

11. Paragraph 307 of the Code provides that:

"A barrister must not: ...

(d) ... (save as a remuneration in accordance with the provisions of this Code) accept any money by way of loan or otherwise from any client or any person entitled to instruct him as an intermediary".

12. Paragraph 405 of the Code provides that:

"Subject to paragraph 407 [the prohibition on handling client money quoted above] a self-employed barrister may charge for any work undertaken by him (whether or not it involves an appearance in Court) on any basis or by any method he thinks fit provided that such basis or method:

(a) is permitted by law;

(b) does not involve the payment of a wage or salary".

13. The Written Standards for the Conduct of Professional Work, General Standards, paragraph 8.2 provides that:

"A barrister should ensure that he is able to provide his professional client with full and proper details of and appropriate justification for fees which have been incurred, and a proper assessment of any work to be done, so that both the lay client and the professional client are able to determine the level of any financial commitment which has been incurred or may be incurred."

14. A self-employed barrister who is a notary may handle client money, so far as the notarial rules permit, subject to it being made clear that he is acting as a notary in connection with that activity: Guidance for Barristers / Notaries produced by the PCCC, issued July 2007 and reviewed September 2008.

Definition of "client money"

15. "Client money" is not defined in the Code.

16. It is tolerably clear, however, that what is meant is money to which the client is still beneficially entitled - that is, money held by a barrister on behalf of or on trust for the client.

17. It is interesting to note the relevant rules applicable to solicitors, the SRA Accounts Rules, which at paragraph 12.1 refers to "client money" as "money held or received for a client or as trustee, and all other money which is not office money [money which belongs to the solicitor or the practice]". "Client money" is then defined to include money held and received:

"(a) as trustee; ...

(c) for payment of unpaid professional disbursements; ...

(e) as payment on account of costs generally".

18. It is clear that barristers do regularly charge fixed fees for work (such as brief fees) and this does not contravene the client money prohibition. The question is whether the making of a collateral arrangement for the barrister to pay the client money in certain circumstances changes this.

Risks

19. The risk is that the arrangement considered in this guidance is construed by a Court as creating a trust of the initial up-front payment in the hands of the barrister or otherwise giving the client a proprietary interest in some or all of that up-front payment.

20. If any part of that up-front fee were to be held on trust for the client, then the barrister would be holding "client money" and hence in breach of the Code.

21. Barristers contemplating this arrangement should bear in mind that:

(1) it is common for other professionals (for example solicitors, accountants) to take money on account of fees, and lay clients may well be used to that arrangement;

(2) if the client is unsophisticated (and even if he or she does not have experience with the holding of moneys on account), the client may still believe that the initial, up-front payment is still the client's money which is given to the barrister as security for his fees.

Issues to bear in mind

22. There is no reason why the arrangement dealt with in this guidance cannot be made to work, however it is necessary to ensure that the true legal basis of the arrangement is clearly understood by both barrister and client.

23. It is vital for the barrister to ensure that the client appreciates that the initial up-front payment is:

(1) an up-front fee to secure the barrister's services;

(2) an absolute payment, not one held on trust; and

(3) a payment which will not be returned to the client, regardless of how quickly the matter can be dealt with.

24. The client must then be told in terms he or she understands that the barrister promises to the client, as a separate and independent obligation, to pay the client a sum if, on a time-costed basis [2], the total which the barrister would have charged on that basis is less than the initial up-front fee.

25. Given the complexity of this arrangement, particularly for unsophisticated clients, the barrister should only entering into such an arrangement if:

(1) it is reduced to writing as part of the initial terms of that barrister's engagement;

(2) the barrister also orally explains the arrangement. The latter is important even for sophisticated clients, given the possibility that they will simply believe that the arrangement is the same as taking money on account; and

(3) the barrister reasonably believes that the client has understood the proposed arrangement.

26. Barristers must also be aware that any fixed, up-front fee must itself be able to be justified under the Standard referred to in paragraph 16 above, without reference to the barrister's collateral obligation to pay money to the client.

Alternative arrangements

27. Barristers who are concerned with being able properly to explain the arrangement discussed in this guidance could consider a simpler variant:

(1) charging a fixed, up-front, fee; and

(2) agreeing that once the fee which would have been due on a time-charging basis exceeds that up-front fee, then the client will pay on whatever further basis as may be agreed between them (for example, on a time-charging basis, with or without any cap on total fees).

28. To be acceptable to clients, it is likely that the fixed component will have to be smaller than it could potentially be with the principal arrangement dealt with in this guidance (since there is no provision for the barrister to pay anything to the client). However it does still provide the barrister with a certain level of protection against unpaid fees.

29. In the future, arrangements may be able to be made for an appropriate third party to hold funds on escrow (or as stakeholder) for both barrister and client, so that the barrister can get the commercial benefit of moneys being held on account without being constrained by the client money prohibition. However this is very much work in progress and raises a plethora of regulatory concerns which would have to be addressed first.

[1] The same sort of arrangement could be (and perhaps is) also made in relation to disbursements which a barrister may have to incur on behalf of clients.

[2] The hourly charging rate must also be agreed as part of this limb of the arrangement.

First issued: January 2012

Standards Committee

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