When I started working on solicitors’ compliance assignments, way back in 2000, the 1998 Solicitors Accounts Rules had been in place for 2 years.
These rules stayed in place protecting client money until 2011 when they were replaced by the rules that exist today. This change appeared to bring the rules up to date with technology, ensuring there were easier options for solicitors to write off small, long standing balances.
Since 2011 however, there feels like there has been consultation after consultation, rule change after rule change, the most recent of which was announced on 13 June 2017 by the Solicitors Regulation Authority (SRA) with regards to its handbook.
This followed extensive consultation, with the ultimate aim being to create shorter, clearer principles and codes, as well as simpler accounts rules, and is the third (and final) phase of the SRA’s review of the Accounts Rules.
Phase one, which came into effect in October 2014, made minor changes to the format of the annual accountant’s report that legal firms were required to obtain. It also introduced an exemption for certain firms from the need to obtain that report. It is our
understanding that the SRA were finding a number of the pre October 2014 reports being submitted only contained very minor breaches and they did not add much, if any value.
It also removed the requirement for firms to submit reports if any breaches of the Accounts Rules were found to be non material in nature.
Phase two, implemented in November 2015, encouraged reporting accountants to apply an outcomes-based approach to assessing compliance, with a greater focus on risks to client money. From an accountant’s perspective, this was welcomed as despite it being a change in our approach; it was a sensible adaptation. During our planning stage we now complete intensive detailed tailoring and discussions regarding the actual work that will be undertaken for each practice, which is a departure from the staunch, “these are the rules and if there is a breach, it will be reported” stance. We can now apply judgement and complete the right amount of testing in each area based on risk.
The exemption from the obligation to obtain an accountant’s report was also extended to firms that have an average client account balance of no more than £10,000 and a maximum balance totalling no more than £250,000 over the accounting period.
This current third phase has looked more widely at the existing Accounts Rules and proposes broader change to the core Accounts Rules, which have not changed significantly for many years. They are prescriptive and restrictive, and focus on consistency across all legal practices in handing money the same way, irrespective of any other circumstances.
Proposals for change*
The SRA propose to:
Simplify the Accounts Rules: by focusing on key principles and requirements for keeping client money safe, including:
- Keeping client money separate from firm money
- Ensuring client money is returned promptly at the end of a matter
- Using client money only for its intended purpose
- Proportionate requirements for firms to obtain an annual accountant’s report
This will put the focus on what is important and allow firms greater flexibility to manage their business. The Accounts Rules will also be simpler and easier to understand. The Accounts Rules will be supported by an online toolkit which will comprise of guidance and case studies to aid compliance
Change the definition of client money: to allow money paid for all fees and disbursements for which the solicitor is liable (for example counsel fees) to be treated as the firm’s money. Money held for payments for which the client is liable, such as stamp duty land tax, will continue to be treated as client money and therefore required to be held in client account. The impact of the proposed change in definition is expected to remove the need to have a client account for some firms and therefore reduce the associated compliance costs. The changes may also reduce the number of firms required to obtain an accountant’s report through the subsequent reduction in the client account balance
Provide an alternative to the holding of client money: through the introduction of clear and consistent safeguards around the use of third party managed accounts (TPMA) as a mechanism for managing payments and transactions.
Our thoughts?
The new streamlined rules will be a much easier read at only seven pages long. We also expect firms to have more flexibility on how they comply with the rules as much of the prescriptive burden will have been removed. The key definitions of client money, keeping it separate, withdrawals, accounting systems and ensuring breaches are rectified will remain, however the bulk of the detail has been removed.
Changing the definition of client money however, could bring about new and unwelcome challenges. For example, Counsel will effectively become a supplier to the solicitors’ practice and therefore monies received from a client for such costs could then be used as working capital for solicitors’ practices until they deem it to be payable. This could leave Counsel in limbo with the client having paid the monies, but the practice able to hold on to the funds as office monies. Again we will await the final definitions and rules to make further comment.
The benefits that TPMA will bring to a solicitors practice are as yet unclear and until TPMAs are up and running, we will withhold judgment. It’s strongly suspected however this could just end up causing more confusion rather than lending itself to being a plus point for a solicitor’s practice.
Although the new rules may be less prescriptive and leading the firms down the “best practice” route, the focus is still on minimising the risk to client money. Therefore, the importance of ensuring that your firm’s internal controls and procedures to protect client money, are adequate and up to date, cannot be over emphasised, and in this regard we strongly recommend you contact us to ensure compliance. The above changes are not expected to be implemented until late 2018, and we look forward to the final outcome of the consultations and reviewing the new rules once they are completed.
For further information please contact Michael Buxton below:
