New for 2019 – SRA Accounts Rules updated – Simplification doesn’t mean Simple
As part of the long-awaited Looking to the Future programme, the latest accounts rules from the SRA are due to come into force on 25 November 2019, together with an updated suite of other professional standards including:
- Creating separate codes of conduct for firms and solicitors
- Freeing up solicitors to carry out ‘non-reserved’ legal work from within a business not regulated by a legal services regulator
- Allowing solicitors to provide reserved legal services on a freelance basis
- Adding clarity in cases of potential misconduct
- Making the ‘SRA Digital Badge’ a mandatory requirement for firms with a website, effectively authenticating that the firm is a regulated business
However, it is the Accounts Rules that have seen one of the greatest changes, being condensed from a huge suite of technical rules and guidance notes, into just 13 simple rules. That said, as the legal market is not simple in its nature there are still some challenges in these rules!
Here are our highlights:
- Client money is still client money – except where it doesn’t need to be! Rule 2 defines client monies as being held on behalf of a third party in relation to regulated services (being a service that requires SRA regulation to perform it) and in respect of your fees and unpaid disbursements, if prior to delivery of a bill. However – if it’s only for fees and unpaid disbursements and you don’t have a client account, you get a voluntary exemption from this being client money. That is, as long as you tell your client this. One key definition of client money is where it is held as trustee or as the holder of a specified office such as power of attorney or Court of Protection deputy – although it’s not clear whether this just relates to money placed into a client account or if it also extends to clients’ own accounts held as trustee; we await further guidance from the SRA on such points.
- Interestingly, this same rule now prohibits firms having access to disbursements until they have been billed, which could have a detrimental cashflow (or administrative) effect on firms who pay disbursements from their office account. Similarly, the concept of a professional disbursement has been removed. Firms paying for professional disbursements on behalf of a client will need to look closely at their operating procedures, although in practice many that I see often do not reimburse themselves until a bill has been delivered. The concept of mixed money remains.
- Money received from the Legal Aid Agency for costs can now be simply held in the office account.
- Agreed fees will no longer exist. Currently such monies can be held in an office account even where no bill has been raised. Under the new rules this must go to a client account, unless a client account is no longer required under the first point. This is likely to impact firms who work on strict fixed fees, such as will writers, although in our experience such arrangements are rarely seen.
- The much-maligned 14 day rule has been abolished – hurray! Instead, we have the concept of “promptly” which appears for withdrawals and throughout the new rules. This is likely to mean different things to different firms and professional judgement will be needed on the part of the firm (and their auditors) to determine what they feel is suitable for each firm, given their size and complexity. The use of “promptly” instead of “14 days” is likely to make compliance more difficult, although it may help some firms to improve their own cashflow, by mandating access to client monies sooner.
- Rule 5 streamlines the rules and circumstances around withdrawals from a client account, essentially changing this from a prescriptive set of rules to a general principle – “for the purpose for which it is being held” (5.1(a)), and with payments “requiring appropriate authorisation and supervision” (5.1(b)). This is very simple yet effective language, but it does re-emphasise the authorisation and supervision part, which is difficult to get right in all circumstances.
- Firms may need to revisit their authorisation protocols and consider how client monies can be effectively overseen for withdrawals and, more importantly, how controls can be put in place to prohibit, rather than simply discourage, the unauthorised withdrawals. Firms may also need to revisit their internal process documents to define “for the purpose for which it is being held” to ensure this broad definition is not abused and to ensure that the intended use of the monies is properly documented on receipt.
- For firms that operate a client’s own account the only rules to comply with are to obtain statements every five weeks, to reconcile these, and to keep a central register of bills and costs. For firms that operate joint accounts it’s even simpler as they don’t need to reconcile the accounts. These reconciliations, for client’s own accounts, are likely to create a major administrative burden for firms with significant numbers of these, for example where the firm has a number of Court of Protection matters. But with such transactions falling outside the scope of client money it’s not entirely clear what the reconciliation is to, nor what the reconciliation achieves! Practically, this may be an additional reconciliation as an appendix to the primary 3-way reconciliation, as opposed to being integral to it, but again we hope for SRA guidance on this point.
- The rules also clarify the use of Third Party Managed Accounts, which may help some smaller firms to effectively outsource the risk of holding client monies.
There are also a number of smaller changes to the rules but we feel the above are the headline points. In our view, the average established high street firm should not be heavily impacted by the changes apart from client’s own account, if these are operated. As always with such changes, the devil is in the detail and each firm should undertake an assessment of how the rules are going to impact on their procedures.
G+E have a team of specialists in this sector and can help you to prepare for the changes. If you would like to discuss your options, please contact Alex Hird on 01904 464174 or Ed Cliff on 01904 464188.