The legislation – mandatory requirements

Lawyers’ obligations in relation to receiving money and property and trust accounts are contained in Part 6 of the Act.

The Act does not include a definition of “controlled bank account”. Section 110 of the Act, however, says that:

(1) A practitioner who, in the course of his or her practice, receives money for, or on behalf of, any person—

(a) must ensure that the money is paid promptly into a bank in New Zealand to a general or separate trust account …

For the purposes of s 110, subs (3)(b) the Act states that a practitioner is deemed to have receive money belonging to another person in circumstances which include the practitioner taking control of money belonging to that person.

The New Zealand Law Society Te Kāhui Ture o Aotearoa considers that a practitioner has taken control of money belonging to another person if they have made a payment out of a controlled account.  Under s 110(1) of the Act the practitioner must therefore first make the payment out of the controlled account to their trust account, or the trust account of a related person or entity,[1] before the money is paid to the intended recipient from that trust account.

This is a mandatory requirement under the Act.

Good practice

Aside from the mandatory requirements listed above, the following is considered good practice in relation to administering a “controlled account”:

• Appointing a responsible person to ascertain whether there are any controlled bank accounts within a firm and keep a central record from all staff declaring whether they are operating a “controlled account” on an annual basis.
• Include a list of all “controlled accounts” in the monthly and quarterly trust account certificates that must be provided to the Law Society;
• Practitioners without a trust account should also advise the Law Society that they have “controlled accounts” and provide the Law Society Inspectorate a listing of those “controlled accounts” annually to inspectorate@lawsociety.org.nz. This could be done at the same time as filing the annual s 112 certification due by 31 March.
• Developing a protocol for centrally recording these accounts in a register that should be reviewed regularly.
• Each "controlled account" is managed in a manner that ensures the law firm provides accurate reporting to the client and maintains records at a level equivalent to that required for a law firm's trust account.
• Every “controlled account” is reconciled at least monthly, following the same process as required for trust accounts. These reconciliations should form part of the Trust Account Supervisors monthly review process.
• Firms may consider if it is appropriate in the circumstances to pay all the monies from the controlled bank account into the firm’s trust account or the trust account of a “related entity” (as per the definition of related entity in s 6 of the Act).
• When authority is needed for another person’s bank account, it is recommended that the client’s authority is obtained for there to be two signatories on the account. For sole practitioners, the other signatory could be the section 44 attorney or alternate.

The Law Society also strongly recommends that law firms that function without a trust account and maintain "controlled accounts" should appoint a representative from within the firm to undergo Trust Account Supervisor training. Following this training, these firms should uphold the same elevated standards for their "controlled accounts" as those applied to trust accounts.

Why this is important

An article written by Kathleen Robichaud listed on the Canadian Bar Association website outlines the importance of trust accounts

Next to the right and obligation to keep our clients’ secrets sits the right and privilege to take and hold money in trust as a significant and defining aspect of what it means to be a lawyer. The public places a special trust in our profession to hold on to and have the ability to use money belonging to our clients or third parties involved in a transaction a lawyer is acting on. …

Trust accounts are special. They must balance to the penny. They must be properly monitored.…

“Controlled accounts” are special in just the same way. They are accounts in respect of which lawyers have authority or ‘control’ over to use and transact on behalf of other people or entities.

Every law firm or lawyer that operates their “controlled accounts” as though they were trust accounts reduces any risk to the public and the reputation of the profession.

What happens overseas

In Australia controlled bank accounts are known as “power money” and Federal legislation states that a law practice is required to maintain records of all dealings with money held for or on behalf of any person. The practice must maintain appropriate records for these “power money” accounts and must provide an external examiner’s report annually to the regulator. More information on “power money” 

Conclusion

Law firms operating in New Zealand are obliged to adhere to the compulsory requirements listed above in respect of trust accounting and receiving money. It is recommended they adopt the good practice points outlined in this briefing in relation to any controlled bank accounts operated by any lawyer or law practice.

If you have any questions around the operation of “controlled accounts” or the mandatory requirements set out in this briefing, you should contact the Inspectorate at inspectorate@lawsociety.org.nz.

https://www.lawsociety.org.nz/professional-practice/legal-practice/trust-account-management/the-inspectorate/