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The Risk of Relying on a Single Bank: Why Law Firms Need a Contingency Plan

Writer's picture: Paul McCluskeyPaul McCluskey

On Friday, 31st January, a major UK bank experienced a system outage, leaving both individuals and businesses unable to process transactions. This incident highlighted a growing concern in an increasingly cashless society—our heavy dependence on banks functioning without disruption.


When a bank outage occurs, it can have severe consequences. Businesses may be unable to pay wages, settle invoices, or even cover essential expenses like insurance premiums and fuel. For law firms, the stakes are even higher.


The Impact on Law Firms

Banking outages present unique challenges for law firms, particularly when handling client funds. A failure in the banking system can mean missed deadlines for property completions, leaving clients stranded—sometimes quite literally without a roof over their heads. The Friday rush to complete transactions is already a high-risk period, and when CHAPS payments don’t go through on time, the repercussions can be severe.


These issues are not new. You may recall TSB’s major IT failure, which lasted for weeks and led to regulatory fines of nearly £49 million. Unfortunately, when a major clearing bank suffers an outage, the impact often extends beyond its own customers, affecting third-party banks, payment providers, and deposit platforms.


What’s Being Done?

The Bank of England has warned UK banks to improve their ability to recover quickly from outages. However, even the Bank of England itself has faced operational failures, proving that no system is entirely immune to IT disruptions.


Planning for Business Continuity

Given the recurring risk of bank failures, law firms must take proactive steps to protect their operations and clients. A solid business continuity plan is essential for mitigating the impact of banking outages.


For those concerned about compliance with the Solicitors Regulation Authority (SRA) Accounts Rules, there is no restriction on the number of client accounts a firm can hold or the number of banks it can work with. In fact, the Lexcel Standard requires law firms to:

  1. Evaluate risks that could lead to business interruption (1.3a).

  2. Document strategies to reduce, avoid, or transfer those risks (1.3b).


One of the simplest ways to safeguard against banking failures is by setting up a contingent banking arrangement.


What is a Contingent Banking Arrangement?

A contingent banking arrangement means having a secondary client account with a different banking provider. If your primary bank experiences an outage, you can still access and manage client funds through this alternative account, ensuring minimal disruption.

When choosing a contingent bank, it is crucial to ensure that it is not dependent on your primary bank. Many smaller banks rely on larger clearing banks to process transactions, meaning an outage at the parent bank could still affect them. If you’re unsure whether a bank is a clearing or non-clearing institution, simply ask the provider for clarification.


How Your Law Firm Benefits

Having a secondary banking arrangement provides several key benefits:

  • Ensures compliance with risk management requirements.

  • Protects clients from financial/physical disruption.

  • Prevents claims for incurred expenses due to failed payments.

  • Avoids contract breaches caused by missed payment deadlines.

  • Potentially benefit from enhanced banking terms (free banking / higher rates)


By establishing a contingent banking relationship, your firm can uphold its fiduciary duty in managing client funds while safeguarding its reputation and operations.


How Gemstone Legal Can Help

At Gemstone Legal, we specialise in helping law firms set up contingent banking relationships with trusted banking partners. If you want to secure your firm’s financial stability and protect your clients from banking disruptions, we can guide you through the process.


Book a consultation today: Schedule a Call


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