During 2016 we saw the third phase of the SRA consultations to undertake a full review of the SRA Accounts Rules. This phase of the consultation put forward some significant changes to the SRA Accounts Rules and in particular a change in the definition of what represents client money.
The SRA has now provided some interim feedback from 105 responses received under this phase of the consultation. This feedback was announced at the 2016 annual COFA conference.
The elements that were contained within this consultation certainly have some key implications for COFAs in their roles. The following covers the main areas within the consultation and what has been announced thus far.
So what are the proposed changes?
Full details of all the points that were consulted on can be found on the SRA’s website. However in summary the main areas are:
- Simplification of the SRA Accounts Rules.
- Optional use of Third Party Managed Accounts.
- An alternative definition of what represents client money.
Simplification of the SRA Accounts Rules
Over the years there have been a small number of gradual changes to the Accounts Rules in one form or another, with more recent changes arising from the 1st and 2nd phases of the recent current consultation process. These phases of the consultation resulted in certain exemptions on the requirements for firms to obtain an Accountants Report and changes in the way reporting accountants conduct their work from the previous prescriptive tests in place.
Under this 3rd consultation phase, this has included a comprehensive rewrite of the Accounts Rules removing their prescriptive and unnecessarily complex nature from a framework that has been fairly rigid for nearly 20 years.
The full proposed changes can be found within the SRA’s closed consultation documents, but in summary there are far fewer rules (still with additional supporting guidance). Those rules that do remain will contain less detail and remove specific time limits i.e. the transfer of client funds against earmarked costs within 14 days.
The focus on the proposed new rules continues to maintain the safeguarding of client money whilst providing a less rigid operating environment allowing firms more flexibility in their working practices. The aims communicated intend to provide a more competitive and innovative marketplace to enhance service delivery to consumers.
The feedback provided on the responses to this part of the consultation is that most firms taking part welcomed the change to these rules, but had some reservations on how they would be implemented in practice.
Optional use of Third Party Managed Accounts
This area had been consulted upon previously and this phase of the consultation looked to more widely provide the optional flexibility for firms to place client monies within Third Party Managed Accounts (TPMA), intended to be with FCA regulated providers.
The use of these accounts may be introduced as part of the law firm’s risk management strategy and potentially removes the need to hold/operate client bank accounts.
It is however still important that firms and COFAs consider the needs, and act in the best interest of, their clients. For example in certain scenarios the use of TPMAs could be cumbersome for transactional based work, such as conveyancing work types where funds are required to be routed promptly to the correct destination on the day of the intended completion.
The feedback from responses on this part of the consultation were mostly positive. However in the current marketplace the offering of such products by providers is in need of development to make this a viable solution to practices and their clients and to ensure the appropriate safeguards are in place.
An alternative definition of what represents client money
This has certainly been the most controversial and significant change within the consultation process.
The proposed redefinition of client money states that funds paid to a law practice in advance for fees and disbursements in which the firm is liable (including counsels’ fees) will no longer be defined as client money required to be paid into a client bank account.
Therefore such funds will no longer receive the protection afforded to them from a client bank account. This was supported by the fact that consumer protection legislation more generally is greater than when the rules were originally introduced.
Further explanation put forward for this proposal was that the changes are intended to provide consumers with more transparency concerning the cost and pricing for legal services. In addition the rules already specify that an agreed fee paid upfront represents office money to be paid direct into an office bank account and the changes look to align this treatment with other amounts paid on account for costs.
A potential benefit of this specific change could result in some firms no longer holding client money and therefore removing the requirement for an accountants report to be completed.
The feedback on this point was however that many firms opposed the change in this area and the main points put forward on the objection have been:
- Risk of consumer detriment/impact of firm insolvency.
- Consumer access to credit cards and the ability for credit card receipts to be retracted.
- VAT tax points – VAT is due at the point the cash is received into the firm not when it is billed. Those that receive Standard Monthly Payments from the Legal Aid Agency will be familiar with the issues this presents requiring ongoing adjustments each time a VAT return is required to be processed.
- Software changes/training.
So what does this all mean for the COFA?
Whilst the above is still evolving for formal implementation, it is inevitable that some fundamental changes will arise.
It is almost certain that new, less prescriptive SRA Accounts Rules will be introduced which will be a large step into a wider outcomes focused environment. But will that mean COFAs can relax the controls and procedures surrounding client money and a firm’s financial stability?
That is unlikely, certainly under the current COFA responsibilities. COFAs will still need to ensure they are comfortable that the firm’s controls and procedures are in place to effectively safeguard client money and to maintain financial stability of the firm.
In the absence of specific rules the COFA may wish to introduce separate bespoke firm polices, such as the timing of when client funds earmarked for costs are transferred. (If still applicable given the proposed client money definition changes!)
The COFA will also need to ensure all applicable staff in the practice receive appropriate training on the changes and are made aware of any new procedures and controls which the COFA may wish to introduce.
COFAs will no doubt have experienced a different approach in the way the reporting accountants have conducted their work from the changes introduced for firms with accounting periods ended after 1 November 2015.
Given some of the fundamental proposals outlined above, reporting accountants may also need to revisit their processes and tailor those as appropriate to the law practice, potentially creating further changes for COFA’s to contend with.
There should be further announcements on the potential changes outlined above and the SRA have indicated that any implementation of new rules (not just the SRA Accounts Rules) will be no earlier than April 2018.
Jason Mitchell ACA, is a Legal Sector Specialist for Francis Clark LLP is a top 25 UK accounting firm, which provides taxation, accounting and commercial advice to over 100 law firms nationally. Jason writes for Legal Abacus on a regular basis featuring in our COFA Corner section.
This publication is produced by Francis Clark LLP for information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of its production), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.