Loans from one client to another client
Regulation of practice committee
Situations have occurred where solicitors holding funds on behalf of a client have organised for those funds to be loaned to another client in need of funds. Investigating accountants have seen instances of substantial sums of money being transferred from one client ledger to another unrelated client ledger. On enquiry, solicitors have indicated that the relevant authorisations to the transfer of funds have been agreed by the clients. It is often found that the paperwork or vouching documentation on the files in support of these loans is deficient, and solicitors have been required to obtain supporting documentation and waivers from the clients involved.
The Law Society is now issuing a recommendation that no sum in respect of a private loan from one client to another client should be paid out of client funds held for the client lender, either by means of a client ledger transaction between the clients or to a client borrower directly. Any such loan arrangements between clients should be a matter for the clients involved to be dealt with between the parties.
It should also be noted that any solicitor who engages in any activity that amounts to carrying on the business of moneylending is subject to the provisions of the Consumer Credit Act 1995 as well as other associated legislation such as the European Communities (Consumer Credit) Regulations 2010 and other instruments, such as the relevant consumer protection code. In addition to the specific legal obligations and liability that such laws create, a breach of them could, in addition, amount to conduct that is professional misconduct.
Moneylending and the provision of credit to consumers is now a highly regulated area of law, and solicitors should ensure that their conduct does not enable persons engaged in such activity to evade their regulatory obligations by purporting to conduct such business through a solicitor’s firm.
It should also be noted that the existence of unexplained and/or unclear loan arrangements in a solicitor’s practice may give rise to a suspicion of money-laundering and may trigger reporting obligations for the Law Society in that regard.