Trust accounts: attorneys must disclose your options
The law should compel attorneys to disclose to you all of your options when you entrust money to them – and it should compel them to pay you the best interest rate they can get from their banks when they invest your money.
This is the opinion of Professor Robin Palmer, an advocate and director of the Institute for Professional Legal Training at the University of KwaZulu-Natal.
When you entrust money to an attorney – whether it’s a deposit for legal fees or the deposit or full purchase price of a property you’re buying – the attorney must hold your money in a trust account.
But the interest earned on your money does not automatically accrue to you. In some instances, it accrues to the Attorneys Fidelity Fund, a statutory body established and regulated by the Attorneys Act.
Whether or not you receive the interest depends on the type of trust account used by the attorney.
In terms of the Attorneys’ Act, unless you give an attorney a specific instruction to invest your money for your benefit in terms of section 78(2A) of the Act – not to be confused with section 78(2)(a) – you won’t necessarily be paid the interest earned on your money.
There is no legal obligation on attorneys to disclose this to you, and if the Legal Practice Bill, which is expected to replace the Attorneys’ Act, is enacted in its current form, the status quo remains.
An earlier draft of the Bill provided for all interest earned on client funds to be paid to the Attorneys Fidelity Fund.
Palmer and fellow academic Angela Crocker have written a paper on the payment of trust account interest, with the focus on the ethical duties of attorneys towards their clients and the implications of the Legal Practice Bill.
They say the moral, legal and constitutional justification “for effectively confiscating the interest on money belonging to a client” for the benefit of the Fidelity Fund needs to be considered.
Palmer and Crocker argue that an attorney has an ethical duty to inform you, the client, of all the options available to you in law, to enable you to make an informed decision.
They say that if attorneys were compelled to inform clients of all of their options, most clients would elect to receive their interest and it would dry up the flow of funding to the Attorneys Fidelity Fund. The fund raked in R213 million in interest last year (see “Your interest of R213m went to lawyers’ fund”, above)
“Unlikely as it may appear, the client may actually choose to forego his potential trust account interest – but this must be the informed choice of the client, and not due to the withholding of information by the attorney,” they say.
Palmer and Crocker contend that, as a matter of ethics, “the attorney has a duty to take into account the client’s lack of experience and business acumen, which would impose an ethical obligation on the attorney to inform the client of his section 78(2A) option to receive interest, even in circumstances where no such request has been made”.
They note that an argument may be made that the attorney also has a duty not to undermine the Fidelity Fund, because this fund is ultimately applied for the benefit of the public.
“Even working from the premise that these funds must be construed as being applied for the public benefit, any duty an attorney may have towards the Fidelity Fund is outweighed by the duty to act in the best interests of the client, as the latter duty is paramount.”
The objective of the Attorneys Fidelity Fund is “to protect the public against loss as a result of the theft of trust funds by practitioners. The protection provided by the fund encourages the public to use services provided by legal practitioners with confidence.”
The question is why clients should have to foot the bill for malpractice insurance for attorneys, Personal Finance reader Gareth Richards, says (see box, below).
But Motlatsi Molefe, chief executive of the Attorneys Fidelity Fund, says if you don’t contribute to the fund you shouldn’t be entitled to claim against it.
When you elect to receive the interest on your money held in trust, the fund still carries the risk of having to pay you out if your funds are misappropriated, which, he says, “does not make business sense at all”.
Such a choice should go with exclusion of cover by the fund “as in any insurance-related matter”, he says.
If you elect not to insure yourself, then you should carry the risk of loss – with the only recourse open to you being to litigate against the party who stole your money, he says.
“We are only too aware of the fact that by the time the theft is discovered, the perpetrator has disappeared or frittered away the money.”
To address this, “it would be feasible for the client to make an election that would allow the fund to levy a portion of such interest against it continuing to carry the risk attendant to the theft thereof by the attorney.
“Obviously this would require the current Act as well as the Legal Practice Bill to be changed to cater for this, as they don’t currently. This is a win-win scenario that addresses continuous protection of the public by the fund whilst it remains sustainable in order to carry out this mandate.”
* The deadline for comment on the Legal Practice Bill has been extended indefinitely. Comments can be emailed to Vhonani Ramaano, secretary of Parliament’s Portfolio Committee on Justice and Constitutional Development, at email@example.com.
YOUR INTEREST OF R213m WENT TO LAWYERS’ FUND
Interest earned on your money added a cool R213 million to the Attorneys Fidelity Fund last year, according to the fund’s annual report for 2011.
The fund provides professional indemnity insurance to lawyers if they face claims for theft. The public, in effect, pays the premiums for this insurance by way of interest earned on money entrusted to attorneys.
Typical losses covered by the fund include the theft of money held pending registration of the transfer of immovable property, the theft of money from deceased or insolvent estates, and the theft of settlements in personal injury claims.
In this way, the fund provides a basic level of professional indemnity cover via a non-profit entity, the Attorneys Insurance Indemnity Fund.
“Most medium to large practices purchase top-up cover at their own cost,” Motlatsi Molefe, the chief executive officer of the Attorneys Fidelity Fund, says.
According to the fund’s 2011 report, “the cost of reimbursing the public (in respect of losses arising from theft of trust money by practitioners) increased to an all-time high of R94 million (compared with a previous all-time high of R90 million in 2009).” The 2011 report says that theft claims payments have trebled since 2008.
In a breakdown of the claims paid by area of practice as a percentage of the total number of claims paid in 2011, the report shows that 66 percent of all claims related to conveyancing, 14 percent to third-party claims, six percent to estates, five percent to litigation, and nine percent to “other” claims. The “other” category comprises claims that relate to administrations, collections, criminal, matrimonial, sequestrations/liquidations and bridging finance.
In terms of the value of claims paid by area of practice, as a percentage of the total value of claims paid in 2011, the report shows that conveyancing was responsible for 69 percent of claims, or more than R64 million.
LANGEBAAN COUPLE’S CONVEYANCER DID NOT ACT UNPROFESSIONALLY, SAYS CAPE LAW SOCIETY
The Cape Law Society has dismissed a complaint against a conveyancer who invested money on behalf of a Langebaan couple. The complaint arose from “pitiful” interest earned on R2.6 million that Gareth and Jenny Richards entrusted to conveyancer Lana Ebersöhn.
In September, Personal Finance reported on the Richardses’ complaint.
The offer to purchase signed by the couple stated that their money would be held in an interest-bearing account and that the interest would accrue to them.
When the sale was finalised, Ebersöhn offered them R369 in interest for the two months that their money was invested with Absa.
Before they entrusted their money to Ebersöhn, the Richardses had invested it in a money market fund, where it was earning about R11 500 a month – an interest rate of 5.3 percent a year. The couple expected to earn about R18 000 for the two months that their money was invested with Absa.
When they questioned Ebersöhn about the low interest rate – 0.01 percent – she said it was correct and “in accordance with the rules between the [Cape] Law Society and the banks”.
But when the couple questioned Absa, the bank claimed that Ebersöhn had placed their money in a call account and not in a section 78(2A) account.
The Richardses laid a complaint of misconduct against Ebersöhn with the Cape Law Society, arguing that she had failed to show due care when investing their money. The couple also issued her with a letter of demand for R12 000, which is the maximum amount that can be claimed in the Small Claims Court.
After Personal Finance reported on the Richardses’ complaint, Absa agreed to pay Ebersöhn interest of R12 331, which she duly paid to the couple.
A few weeks ago, the Richardses received a letter from the Cape Law Society stating that the society’s disciplinary committee could see no grounds for a finding of unprofessional conduct against Ebersöhn, but that “the issue around the interest raised on section 78(2A) investment accounts is being escalated to the Law Society of South Africa in order that it may be dealt with at a national level”.