Changes to SRA Accounts Rules
Historically the Solicitors Regulation Authority (SRA) Accounts Rules have comprised of a large number of very specific and prescriptive rules governing how law firms deal with client money. All firms, large or small, who hold client money have had to comply with these rules with no real scope to adapt them to suit their individual practice.
The new Solicitors Regulation Authority (SRA) Accounts Rules have been effective since November 2019.
There have been a number of changes to the SRA Accounting Rules over the last few years with the latest being effective from 25 November 2019. These reforms were approved by the Legal Services Board (LSB) last year and are part of the ‘Looking to the Future’ programme. The SRA aims for the rules to be less prescriptive and more focused on outcomes.
On review, the changes to the rules are generally similar to the previous rules. However, certain rules have been amended or deleted, so care should be taken to understand those changes.
There is no change to the fact that the reporting accountant and the work undertaken by them is intended to provide assurance that client funds are properly safeguarded.
The new rules may affect you and so, detailed below is a summary of the more significant changes that have been enacted.
Legal Aid Agency Costs
Money received from the Legal Aid Agency for costs can in future be held in the office account.
Cease to hold Audits
Cease to hold audits are no longer required when firms have ceased to trade or changed status, unless the SRA specifically requests one.
Money received in advance for fees and disbursements for which the firm is liable can now be held in office account. However, this is only applicable where monies received in advance for fees and disbursements are the only client monies held for that particular client, and those clients have been informed in advance of how those monies will be treated.
Transfer for Fees and Disbursements
Currently, the rules allow firms to transfer money from client account to reimburse themselves for amounts spent or incurred on disbursements without first issuing a bill. Under the new rule 4.3, firms will have to issue a bill of costs, or other notification of costs incurred, to the client or paying party before they can transfer funds from client account. The SRA’s definition of costs includes disbursements.
The concept of professional disbursements has been removed. It seems that all disbursements will be treated in the same way in future.
The concept of agreed fees has also been removed. Previously, money received for an agreed fee could be held in an office account, even if a bill has not been raised. In future, the money will need to be held in a client account until a bill is raised.
Client Account Reconciliations
The new rule 8.3 formally requires the COFA or a manager of the firm to review and sign off the client account reconciliations. It also states that any differences on the reconciliation should be investigated and resolved promptly.
Operation of Client’s Own Account
The new rules stipulate that three-way reconciliations will now be required when operating client’s own accounts (i.e. a deputyship or power of attorney matter). As with the client account reconciliations these will need to be reviewed and signed off by the COFA or a manager of the firm at least every five weeks. The requirement of the three-way reconciliations is a key point which may have big implications on firms operating this type of account, therefore it is important for these firms to review their systems and procedures.
Use of Third Party Managed Accounts (TPMAs)
The new rules permit the use of TPMAs for the purpose of receiving payments from or on behalf of, or making payments to or on behalf of, the client in respect of regulated services.
As with the old rules; you are not required to obtain an accountant's report if all of the client money held or received during an accounting period is money received from the Legal Aid Agency. Similarly you are not required to obtain an accountant’s report if in the accounting period, the statement or passbook balance of client money you have held or received does not exceed an average of £10,000; and a maximum of £250,000 (or the equivalent in foreign currency).
Under the new rules a "statement or passbook balance" is defined as the total balance of all client accounts held or operated by you and any joint accounts and clients' own accounts operated by you.
Details of the new regulatory model, including the Accounts Rules are available on the SRA’s website https://www.sra.org.uk/solicitors/standards-regulations/accounts-rules/. To support the new Accounts Rules (and other regulations) the SRA has issued guidance on several areas to assist solicitors as these changes come into effect.
How can we help?
This is an opportunity to consider how you can apply the principles embodied within the new rules in a way that best suits your practice.
Even if you do not plan to make any changes to your systems and procedures in the near future it will still be important to be able to demonstrate what those systems and procedures are.
Written policies and procedures are strongly advised to ensure your staff comply with your procedures and to be able to demonstrate that client money is properly protected.
If you would like to discuss these new rules in more detail or would like any assistance in determining or drafting suitable policies, please contact us.