All professional bodies whose members hold clients’ money have developed regulations over the years to ensure that money is kept safe and the reputations of its members safeguarded.
The organisations that regulate selling, letting and managing agent firms are no different, and whether the agent is regulated by RICS, Propertymark (previously NFoPP) NALS, ARMA, or one of the other regulatory bodies anyone working in this area is expected to have good controls in place. However a review of the RICS Disciplinary Hearings over the last six months shows, amongst the Health and Safety and Professional Conduct-related items, a flurry of reprimands issued over client money failures.
The findings of the regulatory review visit in one Merseyside firm read like a basic primer into how not to organise a controlled client money accounting system. The inspector visiting the firm found many of the key elements of a good system missing: client bank reconciliations were not prepared on a monthly basis and not reviewed by principals; bank accounts had the word “client” omitted from the title; individual client ledger accounts were overdrawn and non-principals had access to cheque payment and on-line banking systems. (Although, it should be noted that in this case no actual fraud was identified.)
A similar catalogue of failures at an Edinburgh firm did, however, result in a client money fraud of £328k. Here the fraud made use of a non-principal’s ability to make unsupervised changes to payee details on a computer based client accounting system, allowing them to add themselves as a payee on payment runs and then remove their details immediately afterwards, to obscure the audit trail.
In Chesterfield an “unsophisticated fraud” of around £19k which went unnoticed for nearly two years would have been readily identified, according to the inspector, if reconciliations had been prepared and adequately reviewed and the receipts recording and checking system had been effective.
Another firm, this time in Solihull, was also criticised for the lack of client money bank account reconciliations which lead to principals being “unable to confirm whether client ledger balances had become overdrawn or been misappropriated”. To complete the “full house” of basic client money errors this firm also had a suspense account balance of some £37,000 dating back to 1994! (Again, no fraud was alleged in this particular case.)
As members of RICS these firms were all exempt from the requirement for a client account report from an independent accountant. One might hope that the professional advisors of Propertymark firms, and of members of NALS, ARMA and the other regulatory bodies would clearly sign-post such “errors”. However it is a sad fact that these bodies also find grounds for complaint about the quality of client money accounting, and point out that where there are critical reports from their internal inspectors it is not unusual to find “clean” reports from their members’ accountants.
Given the basic nature of these “failures” a short re-iteration of some of the simplest client money controls would be timely, whether aimed at property professionals, solicitors or indeed, accountants:
- All client accounts should contain the word “client” and this should also be shown on the statement – this is a clear demonstration of the trust status of the money.
- Client ledger accounts should not be overdrawn – an overdrawn account shows that some other client’s money has been used wrongly.
- Client bank account should be reconciled regularly – 3 ways, bank statement to cash book to ledger balances.
- Principals should review reconciliations – it’s their responsibility.
- Payments by non-principals from client account by cheque or on-line should be supervised by principals – even family members cannot always be trusted, and errors can go on for years without detection.
- Direct debts and standing orders should not be applied to general client bank accounts – automatic payments are difficult to supervise, so payments should be individually authorised.
- Suspense accounts should be temporary resorts. Trust money can never belong to the agent, every effort should be made to trace the rightful owner, and if he or she cannot be traced, monies should be paid over to a charity, with the appropriate acknowledgement that it must be returned if the rightful owner surfaces.
- Interest should not be retained without client permission – it’s not the agent’s money, it’s the client’s.
- Insurance should specifically cover payments by non-principals and clients should be informed of any operating conditions attaching to their accounts.
This is not a full review of all the client money regulations, which vary in detail from body to body.
You can find a review of the RICS, Propertymark (previously NFoPP) NALS and ARMA client money rules and work programmes for each in the Mercia Property Professionals Specialist Assignment Manual.