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Resources for external examiners

Frequently asked questions from External Examiners

The following will help answer questions EEs and law practices may have when completing an external examination.

Please note: In line with social distancing measures in place in Victoria, external examiners should consider whether to complete their trust account examinations remotely or via ‘virtual’ examinations.

The 30 April deadline is approaching for the submission of Parts A and B of the examination process but the law practice will not meet the deadline. What should we do?

LSB Online will remain available for the law practice to submit Parts A and B and they will be accepted. These should be completed as soon as possible to allow the Examiner to complete their report by 31 May 2021.

The Victorian Legal Services Board and Commissioner has advised external examiners that they may need to conduct remote audits. What advice can you give on auditing law practices with paper-based files and trust records?

Depending on what resources are available to the law practice they can scan and send documents to you, photograph documents by phone and send them to you or have documents couriered to you. In these cases we understand that this may mean examinations are not as thorough as usual and we accept this. Use your own judgement and common sense about how much material to ask a law practice to supply.

I have implemented an off-site audit process with an online portal to upload supporting documents and video conferencing. Is this acceptable?

This is a fantastic way to overcome difficulties experienced due to the social distancing rules in place.

What should I do if I’m expecting to experience delays because the law firm I examine has poor record management?

Start your process early to give the law practice the maximum amount of time to retrieve records.

Do I need to review a whole matter file?

If this is difficult because the file is not available electronically you can request key documents from a file matter, such as certain receipts or copy of payment details, rather than reviewing a whole matter file.

What if the law practice does not comply with my requests?

Some law practices may be working remotely so you may experience difficulties contacting them. If you cannot contact them by phone or email please contact us at: trustgroup@lsbc.vic.com.au

 

The Canaries in the Coal Mine 2022 webinar took place on 24 March 2022.

Access the full recording.

 

It provides a valuable guide to this year’s External Examination year covering:

  • The regulatory picture – an overview of how the regulation of trust accounts works and where EEs fit in;
  • What we expect of EEs when preparing their reports – an overview of the Board’s risk-based regulation with respect to the operation of trust accounts;
  • Overview of Revised External Examiners Course
  • EE Checklist – a useful tool for EEs to use when conducting their visits and compiling their EE reports;
  • Red Flag alerts – Identifying situations where we would like you to notify us of problems whether at the time when you write your report or otherwise and
  • LIV Support – a service provided by the LIV to assist law practices.

If you have any questions about this this year’s External Examinations year please email trustgroup@lsbc.vic.gov.au

What is a Controlled money account?

A ‘controlled money account’ is an account maintained by a law practice with an ‘ADI’, specifically to hold controlled money the practice receives.  ‘ADI’ is defined under Section 6 of the Uniform Law as ‘an authorised deposit-taking institution within the meaning of the Banking Act 1959 of the Commonwealth’. A list of ADI’s can be located on the Australian Prudential Regulation Authority (APRA) website.

Unlike a ‘general trust account’, controlled money accounts do not have to be maintained with ADIs approved by the Board, however, they must be maintained with an ADI.

Elements of Controlled Money

Section 128 of the Uniform Law defines ‘Controlled money’ as being money received or held by a law practice where the practice has been given a written direction to deposit the money in an account (other than a general trust account) over which the practice has or will have exclusive control.

A written direction may be to:

  • deposit the money in an account over which the practice has or will have exclusive control (other than a general trust account) ; or
  • disburse the money (other than for legal costs, court order or as authorised by law)

Written direction for controlled money

The Uniform Law requires a law practice to obtain a written direction from the person on whose behalf the money was received (e.g. the client) before the money can be deposited to a controlled money account. The written direction should be specific to avoid possible breaches of the Corporations Act, as law practices are prohibited from giving financial advice to a client (except where the law practice has an Australian Financial Services Licence).

It may be prudent for the written direction to have the details of the matter, reason for the investment, name of the ADI and the type of account (e.g. type of product that an ADI offers) added to the written direction. The law practice should refrain from giving the client advice about investing with a specific ADI and/or type of ADI account.

As soon as practicable after receiving controlled money, a law practice must deposit the money in the account specified in the written direction. In addition, the law practice must ensure that it does not pool controlled money with money held on behalf of another person.

If there is no written direction

In the absence of a written direction, the following avenues would apply:

  1. If a cheque is made payable to the law practice – the money must be deposited into the practice’s general trust account pending written instructions from the person
  2. If a cheque is made payable to the client (or the person on whose behalf the money is held) – the cheque must be delivered to the client or returned to the drawer of the cheque as the money is considered as ‘transit money’
  3. If cash is given to the law practice – the money must be deposited into the practice’s general trust account pending written instructions from the client.

Establishing a Controlled Money Account

A law practice must establish a controlled money account with an ADI as specified in the written direction as soon as practicable after receiving controlled money. The practice may open a controlled money account in anticipation of receiving controlled money after receiving a written direction to do so.

The Controlled Money Account must include the name of the practice, the expression ‘Controlled Money Account’ or ‘CMA’ and particulars to identify the purpose of the account.

It is also suggested that ’ITF’ be recorded in the account name to remove the requirement on the law practice to submit a trustee return as per a tax ruling.

The law practice should be aware that Section 139(6) of the Uniform Law prevents law practices from pooling controlled money. This means the controlled money account must be held exclusively on behalf of the person directing the opening of the account.

When Investment Money is not Trust Money

Section 129(2)(b) provides that the following money is not trust money:

  • money entrusted to, or held by, a law practice for, or in connection with, a managed investment scheme or mortgage financing undertaken by the law practice.
  • money received by a law practice for, or in connection with, a financial service it provides in circumstances where the law practice, or an associate of the law practice, is required to hold an Australian financial services licence covering the provision of the service, or provides the financial service as a representative of another person who carries on a financial services business.
  • money received by a law practice for investment purposes.

‘Australian financial services licence’, ‘authorised representative’, ‘financial service’ and ‘financial services businesses’ are not defined in the Uniform law or the Uniform General Rules. The Board is of the view that these terms have the same meanings as in Chapter 7 of the Corporations Act 2001 (Cth).

Disclosure to Clients— When Investment Money is not Trust Money

When a law practice receives or holds money that is not trust money (other than money for the payment of legal costs due to the law practice), it must give the person who provided the money written notice (Section 134).

When Investment Money is Trust Money

Section 129(2)(d) provides that money that is received by a law practice for investment purposes is trust money if both of the following criteria are satisfied:

  • the law practice received the money in the ordinary course of legal practice and primarily in connection with the provision of legal services at the direction of the client; and
  • the investment is, or is to be, made in the ordinary course of legal practice and for the ancillary purpose of maintaining or enhancing the value of the money or property.

The designated regulatory authorities suggest that any law practice investing money that has been entrusted to the law practice should obtain a written direction from the person on whose behalf the money is held, unless acting under a power.  The written direction provides evidence that the law practice is not making investment decisions on behalf of a person on whose behalf money is held which may be in breach of the Managed Investments Act 1998 (Cth) and/or the Corporations Act 2001 (Cth).

Example

If a law practice was entrusted with settlement moneys from the proceeds of sale, the settlement monies are recognised as trust money. This trust money is then receipted through the trust records of the law practice (the general trust account or a controlled money account). If the law practice is subsequently given further instructions to invest the trust moneys in a non ADI, or to buy shares or other property on behalf of the client, this is still trust money.

‘Power money’ is where a law practice, approved clerk or an associate of the law practice is given a power or authority to deal with money for, or on behalf of, a person.  Examples of power money can include power of attorney, grant of probate, guardianship order, or an authority to sign on a person’s bank account (whether alone or jointly).

Maintenance of the Register of Powers and Estates does not apply to an approved clerk, and power money does not apply to a barrister in New South Wales.

Record Keeping Requirements

The law practice or approved clerk must keep:

  1.  a record of all dealings with the money to which the law practice, approved clerk or associate is a party; and
  2.  all supporting information in relation to the dealings, in a manner that enables the dealings to be clearly understood.

Recording all dealings

Where a law practice has been given the power to deal with money for, or on behalf of a person, the Board suggests the law practice recording all dealings in a ledger style document.

The law practice or an approved clerk must keep the record, supporting information and the power or authority as part of its trust records. This means the practice should retain all bank statements, information supporting any withdrawal of trust money (including the payee and supporting invoices/receipts in relation to the payment) and cheque books (if any) for a period of seven years (Section 147(2)(d)).

In situations where two law practices or approved clerks are joint signatories of a bank (ADI) account and where there is only one bank statement, the law practices or approved clerks can, by agreement, allocate the task of record keeping to one law practice or approved clerk and ensure that the other law practice or approved clerk receives a copy of records at least monthly.

If at the time a law practice or an approved clerk receives trust money (other than cash), and it also receives a written direction from a person legally entitled to provide it, directing it to deal with the money otherwise than by depositing it into the general trust account, the law practice or the approved clerk is obliged to follow the person’s instructions.

’Written direction money’ is defined in Rule 34 for a law practice to mean trust money that is received or held by a law practice where the law practice has a written direction to deal with the money otherwise than by depositing it in a general trust account, and that is not controlled money.  For approved clerks, written direction money is introduced in section 137 of the Legal Profession Uniform Law Application Act 2014  as ’unless the approved clerk has a written direction by a person legally entitled to provide it to deal with the money otherwise than by depositing it in the account’.

Person legally entitled to provide written direction

Although not defined in the Uniform Law, the operation of Section 137(a) provides for a person to give binding written directions to a law practice or approved clerk about trust money, provided that person is “legally entitled” to do so.

Example of Written Direction Money

An example of written direction money is where a cheque is received by, and made payable to, a law practice or approved clerk where the person legally entitled gives a written direction that the money be deposited into their bank account, rather than the law practice’s or approved clerk’s general trust account.  The entitled person cannot give written direction to deposit the money into the law practice’s or approved clerk’s office or general account, or any other account in which other money is held by the law practice or approved clerk, as Section 146 precludes a law practice or approved clerk from mixing trust money with other money.

Examples of possible ’legally entitled’ persons

A person may become ‘legally entitled’ when a court gives written orders as to the way a person’s trust money is to be handled.  Examples include

  • a spouse in a Family Court Order;
  • a trustee in bankruptcy with a Sequestration Order;
  • a guardian with a Guardianship Order;
  • or a statutory notice from a government department such as the Australian Taxation Office or Child Support Agency where the notice establishes that the department or agency has a “legal entitlement” to particular trust money not yet deposited into the general trust account or controlled money account.

Ensuring a person is ‘legally entitled’

A law practice or approved clerk faced with this particular situation must ensure that the person providing the direction is ‘legally entitled’ to do so. Additionally, the law practice or approved clerk should ensure that the person’s claim to ‘legal entitlement’ relates to the specific trust monies concerned. That is, that the trust money is not protected from a claim of legal entitlement, such as, protected money or assets listed in the Bankruptcy Act 1966 (Cth).

Transit money means money received by a law practice subject to instructions to pay or deliver it to a third party, other than an associate of the practice.

Section 140 requires the law practice to pay or deliver the money, as required by the instructions relating to the money, within the period (if any) specified in the instructions. If the period is not specified, the money must be delivered as soon as practicable after receipt.

Record keeping requirements

For transit money received by the law practice, Section 140(2) requires the practice to record and keep brief particulars sufficient to identify the relevant transaction, and any purpose for which the money was received.

Where third party cheques are received, a law practice should ensure, where possible, that copies of the cheques are retained. Copies of other documentation received should also be retained. Examples include settlement directions from the vendor and directions from an incoming mortgagee, or directions to an agent.  Together, these kinds of records will assist a law practice to discharge its obligation in respect of Section 140(2) ’to record and keep brief particulars sufficient to identify the relevant transaction and any purpose for which the money was received’. Transit money records should be kept in the client file.

Retention of Records

The brief particulars that must be retained for transit money (such as written directions, authorities or other documents) come within the definition of trust records in Section 128. In accordance with Section 140(3) these trust records are to be kept for a period of 7 years.

Transit Money Received in Cash

The law practice must deposit transit money received in cash into the general trust account as soon as practicable after receiving the money and before dealing with it in accordance with the instructions (Section 143). A trust receipt should be issued and the money dealt with according to the instructions as soon as practicable.

A law practice must maintain a register of powers and estates for trust money where the law practice or an associate of the practice is acting (or entitled to act) alone or jointly with the law practice, or one or more associates of the practice.

This does not apply where the law practice or an associate of the law practice is also required to act jointly with one or more persons who are not associates of the law practice (Rule 60(2)).

Required particulars

The register of powers and estates must record:

(a)   Particulars sufficient to identify each power where the law practice, or an associate of the law practice, is acting (or entitled to act) alone or jointly with the law practice or one or more associates of the law practice. This includes the name and address of the donor and date of each power.

(b)   Particulars sufficient to identify each estate in where the law practice, or an associate of the law practice, is acting (or entitled to act) alone or jointly with the law practice or one or more associates of the law practice. This includes the name and date of death of the deceased for each estate of which the law practice or associate is executor or administrator.

A suggested format of the Register of Powers and Estates is:

Date of Power Name and Address or Donor/Deceased Matter Reference Description of Power Date of Death of Deceased Responsible Solicitor
 .          
 .          
 .        

The External Examiners Checklist has been prepared by the regulatory bodies in Victoria and NSW to guide the law practice, Barristers Clerks and External Examiners through an examination of the various forms of trust records required to be maintained.  The Checklist will assist in the assessment of compliance with the legislation relating to trust accounting.  This Checklist has been customised for bodies in Victoria, External Examiners can access the NSW version from the Law Society of NSW website.  The use of the Checklist is not mandatory.
 

This short video will explain how to use LSB Online to complete an external examination report.

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