27 November 2019
The 2019 SRA Accounts Rules became effective from 25 November 2019 and are shorter, less prescriptive and much more outcomes-focused. The principles, however, remain the same and ensure client money is kept safe. The SRA has said that it expects most firms to carry on doing what they have always done when handling client money, if they are satisfied they have been compliant. However, many firms may need to make some changes to current procedures. The guidance now sits outside of the rules and can be found at: sra.org.uk/solicitors/guidance/guidance
Below we set out key points to note and provides links to useful guidance.
Key points to note
- There is a specific change made in defining client moneys (under 2,1[d]) as being “in respect of your fees and any unpaid disbursements if held or received prior to the delivery of a bill for the same.” There is no mention of work being performed.
- A significant change relates to client to office transfers for fees and disbursements, although the rules are a little misleading. Rule 2 states ‘“Client money” is money held or received by you …in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same.’ This indicates that money for disbursements is only client money where the disbursement is unpaid and a bill has not been issued. However, rule 4.3 then says the following: ‘ Where you are holding client money and some or all of that money will be used to pay your costs: you must give a bill of costs, or other written notification of the costs incurred, to the client or the paying party.’
So, technically, the firm is not holding client money where the disbursement has been paid, in which case, they don’t technically need to raise a bill if they want to take the money. The safer option is to raise a bill but it is open to interpretation.
Firms will need to review their policies and consider updating them. Firms need to consider if they will:
- Raise a bill for disbursements only;
- Raise ‘other written notification of costs’ (letter or email – how will they keep records of the notifications? Rule 8.4 requires they keep a readily accessible central record of bills or other written notifications of costs); or
- Continue to raise the bill at the same stage as always, and therefore delaying the transfer of some disbursements.
Other key updates
- The concept of professional disbursements has been removed – all disbursements will be treated in the same way in future.
- Money received from the LAA for costs can be held in the office account.
- All of the old timescales have been removed; a principles-based approach allows the firm to determine their own timescales. For example, this would seem to allow a longer timeframe for depositing cheques for firms with no local bank branch. It is worth noting that the previous guidance provided by the SRA stated that good practice tends to be within 5 working days. New guidance also mentions that firms are required to keep a record of all receipts of money in, for example by using a cash diary. Rule 4.3 does not specify a timeframe either, however 14 days is probably not an unreasonable timeframe to adhere to. As a starting point, firms should review each area of the rules and ensure they have written timeframe policies in place, and the 2011 rules provide a sensible guide.
- There isn’t much detail in the rules surrounding residual balances, however, there has been a separate statement issued which provides detailed guidance. The statement provides guidance for firms considering sending residual balances to charity that are less than £500. Read more here.
- Banking facilities remain a high-risk area. Updated guidance was released in August 2018, which reminds firms of the risk of providing banking facilities if money is held without good reason or where no regulated services are being delivered. Find out more here.
- Client account reconciliations must be reviewed and signed by COFA. Differences/adjustments need to be investigated by the COFA and resolved promptly.
- Firms running clients’ own accounts will now be subject to reconciliations every five weeks, i.e. ledgers need to be kept going forward.
What else should firms be doing?
- If you haven’t already, make yourself familiar with the new rules as well as the detailed guidance.
- Maintain a breach register if you don’t already; there is no mention of this in the rules or guidance, but these should be kept anyway to record and identify breaches and make sure systems and controls are above adequate.
- Keep a live list of bank accounts – general, deposit, clients’ own, joint accounts, office accounts, etc.
- Create an ‘accounting manual’ that documents systems and policies – this is very important. This should include appropriate details, systems and controls and will help ensure compliance with the rules and principles. This also ensures clarity for all employees, including training new staff, and will assist the COFA.
Systems to consider
- Review by COFA of client reconciliations and investigation of any differences – it is advisable to also do the same with office reconciliations.
- Regular review of credit balances on the business side of the ledger (ensuring client money is not improperly held there).
- Processes that ensure that client files are properly and promptly closed and balances repaid.
- Systems ensuring client money retained is for proper reason.
The guidance ‘Helping you to keep accurate accounting records’ essentially updates Appendix 3 to the 2011 Rules. This guidance provides a useful checklist of key areas to consider when reviewing your systems and controls to ensure they are above adequate.