The Law Society advises members that financial institutions may apply holding periods to paper-based payments. Paper-based payment instruments such as cheques (including trust cheques), certified cheques, money orders, and bank drafts can be subject to forgery and fraud. They can also be returned due to insufficient funds, holds, restrictions on deposits or stop payments. As such, financial institutions have adopted strategies to minimize risks, which sometimes involve holding money until they can verify the funds.

A financial institution may hold money from a deposited cheque to:

• Ensure that the person or company who wrote the cheque has enough money to cover it;
• Ensure that the person or company who wrote the cheque has not put a stop payment on it;
• Check the details with the cheque writer to make sure that it has not been altered; or,
• Ensure that the account on which the cheque was written is still open.

We understand that a hold on a legitimate payment can cause potential issues with closings and lawyers’ undertakings, as it can take three to five business days to be validated, if not more. This holding process is the new standard, and members must prioritize client management and set their clients’ expectations accordingly. Before making a withdrawal from trust, a lawyer must ensure that the client has sufficient money in trust to cover the withdrawal and that the trust bank account has sufficient funds to permit the completion of the withdrawal. Failure to complete the second step is a common source of inadvertent trust shortages, where a payment is made before the necessary funds have cleared the bank account. To prevent these types of shortages, members should consider:

• Allowing three to five business days for any paper-based payment instrument to clear the bank before making a withdrawal (the deposit slip from the bank does not guarantee that the funds have cleared or will clear the bank, and should not be solely relied upon); and
• Receiving funds by electronic funds transfer, as this method may be more expeditious, depending on your banking arrangements.

If you have questions regarding trust accounts, contact Nicole Miller, Trust Compliance Auditor at nmiller@lsnl.ca.

Posted: April 10, 2024