The New SRA Accounts Rules - 25 November 2019
As we highlighted last month, the Solicitors Accounts Rules are facing their biggest overhaul in over 20 years. The new Rules will come into immediate effect on 25 November 2019, meaning changes to your systems and procedures will be required.
At first glance, it seems as though the new guidance is simply a rehash of the old guidance, but there are quite a few elements to be aware of. It is vital that law firms give due thought to the implications for their accounting procedures and systems for dealing with client money starting from 25 November 2019 to ensure continued compliance with the Rules.
What was the Solicitors Regulatory Authority’s (SRA) motivation behind the changes?
The areas that the SRA were primarily concerned with were:
- The safeguarding of client monies
- The provision of banking facilities
- Unnecessary retention of client monies
- To introduce extra checks on procedures surrounding the operation of clients’ own accounts
- Official documentation of office policies and control processes.
What does this mean for us, as your accountant?
From our perspective as reporting accountants we will be completing our next review as normal, but testing on the 2011 Rules up to 24 November 2019 and testing on the new rules from 25 November 2019 to the period end.
The existing, highly prescriptive rules are being reduced to just 13 shorter Rules, which takes into account the varying systems and processes across different law firms. The new regime focusses on systems and procedures.
Some of the main differences to note are:
- There is no longer a distinction between professional or non-professional disbursements, SDLT and unpaid HMLR fees are still client money under the general definition
- Client money and client accounts - Rule 2.3 (formerly 17.1), ‘promptly’ is no longer defined; the transfer of client money in office account was previously stated to be the ‘next working day’ or 14 days for
- mixed monies. If there is no reason to discontinue this, we don’t see the reason to change our current procedures providing they are documented.
‘Office Account’ becomes ‘Business Account’
‘Clients’ becomes ‘Customers’
‘Office Money’ will no longer be used.
Whereas the 1998 and subsequent 2011 rules were very prescriptive and essentially a ‘one size fits all’ list, the new Rules are more open to interpretation by the law firm itself. The new, shorter rules offer law firms of different shapes and sizes the flexibility to introduce new systems and procedures that both protect client money as well as introducing practicalities for the firm.
This flexibility, whilst offering a lot of positive changes for law firms will not be without its challenges. Implementing principles-based policies via a system geared to ensure compliance with highly detailed rules requires both thought and discussion. Naturally, there will be some upheaval in changing procedures, but firms should embrace the opportunities the changes present, for example, new systems that will save administration time (i.e. less frequent banking – see below) whilst still being able to demonstrate overall compliance.
What do we need to do now?
As a starting point, we would recommend that each COLP, COFA and accounting team read the new rules along with the available guidance on the SRA’s website, which can be found here: https://beta.sra.org.uk/accounts-rules. You should also consider our at a glance list of the changes below:
At a glance list of changes:
Firms now need to ensure:
- Client account reconciliations:
That there is evidence of review of differences on the client account reconciliations. This should be conducted by a Manager or the COFA. Whereas in the past this was recommended as best practice, this now forms part of the Rules.
- Credit balances:
That there is evidence of regular review of credit balances on the office side of the ledger, ensuring client money is not incorrectly held there.
- Closing files:
That they establish and maintain up to date written processes that ensure client files are properly and promptly closed and balances repaid on a timely basis. We would suggest that this is part of the file close down procedures and this is completed after a short period, say 30 days. This is good housekeeping and should be kept up to date.
- Client money retention:
There are systems in place to ensure client money retained is for proper reason and there is ongoing notification.
- Third-party managed accounts (TPMAs):
This guidance covers new Rule 11. TPMAs can be used for all or part of the firm’s client matters. Whilst prior approval is not required, the guidance highlights the SRA’s expectations when a firm uses TPMAs, i.e. ensuring in advance that:
• The TPMA provider is regulated by the FCA
• The money is beneficially owned by the third party; and
• The account can provide access to regular statements.
Furthermore, key SRA Code of Conduct issues that equally apply to TPMAs are:
- For Solicitors, RELs and RFLs:
Rule 8.6: states that this information must be provided to clients in a way they can understand
Rule 8.11: states that solicitors must ensure their clients understand the regulatory protections which apply, as these are different for TPMAs as opposed to normal client accounts.
- For law firms:
Rule 2.1: states that effective governance structures, systems and controls are in place to ensure everyone in the firm complies.
The SRA expect to be notified when a firm uses a TPMA (via their TPMA form) and be kept up to date on any changes you make.
There are various references to ‘promptly’ in the 13 Rules. A principles-based approach allows the firm to apply their own interpretation of what constitutes ‘promptly’. Thus, there are now no prescriptive time frames to adhere to, which allows firms to implement their own to suit their particular practice size and requirements. Whilst this doesn’t allow for huge wholesale changes, it would, for example, allow a firm with no local bank branch to meet the ‘prompt banking requirement’ by depositing client cheques received less often than every other working day, i.e. once a week.
We would recommend each firm review the new Rules and guidance to ensure that it has written policy timeframes for each aspect of the Rules. Any new timeframe should be fair and reasonable and should still place the safety of client money at the forefront of all new systems new procedures.
Transfer of client monies for costs
‘Promptly’ also appears in new Rule 4.3 concerning the practice of transferring money earmarked for costs - again there is no specific time frame. Whilst all of the changes and the new principles are important, particular care and attention should be applied in circumstances where billed costs become the firm’s money, as the principle of separation applies, meaning the money should not ‘languish’ in the client account. Again, firms must establish and document what they perceive to be a ’reasonable timeframe’. This can be any justifiable timeframe and is worthwhile discussing internally. As per the 2011 rules, 14 days is probably not an unreasonable period of time; whichever timeframe is agreed, this should specifically form part of policy, and can not simply be implied.
As a starting point we envisage that most firms will adopt everything it can from the 2011 Rules, but that going forward there will need to be evidence of the procedures and policies in an ‘accounting manual’. Such a manual should detail systems and controls appropriate for the size and type of legal practice. This manual will also be important for:
- Providing evidence to the SRA of how the firm ensures compliance with the Rules and principles should it ever be required to do so
- Setting out to Mitchell Charlesworth, as the firm’s Reporting Accountant, the framework against which (alongside the Rules and guidance themselves) we will carry out our review and ultimately complete our report
- Ensuring clarity for both the accounts and fee earning teams of the firm’s procedures for compliance
- Assisting the COFA in determining whether a breach has occurred and in assessing the seriousness of any breaches
- Training new staff involved in dealing with client money – this will be very important in the future. As differing systems and procedures evolve over time across different firms, accounts staff will no longer be able to move from one firm to another without being aware of their individual systems and procedures. It is highly unlikely that all firms will be reporting under the same systems and procedures.
Retention of client monies without reason
Whilst not strictly a change, the new guidance highlights the risk of providing banking facilities if money is held without good reason or where no regulated services are being delivered. Holding client money without reason following the conclusion of the matter could be seen as a banking facility, so this is something to be aware of, this is now covered by Rule 2.5 (formerly rules 14.3 and 14.5).
To read the full set of rules please click here.
We expect that the changes will evolve over time and we anticipate further guidance from the SRA and other governing bodies, including the ICAEW, in the coming months. Naturally, we will keep you updated on such guidance. We expect any further clarification to focus on:
- Rule 10 - operating client’s own account as signatory – the SRA are aware of some of the complexities here and are giving this further consideration
- An updated Warning Notice on the prohibition on providing banking facilities through client account
- Further details are awaited concerning residual balances and payments to charity.
We’re aware that there is plenty to consider over the coming days and months. If you do have any queries then you should not hesitate to contact Mike Buxton to arrange a meeting to discuss this in more detail.