In June 2017, the SRA published responses to the third and final phase of its review of the SRA Accounts Rules.
The consultation looked to simplify the Account Rules, redefine the definition of client money and provide an alternative to holding client money by using third-party managed accounts.
Within the published responses of the consultation, the SRA has released a draft set of the proposed new rules, together with a draft, updated glossary. These contain a significant reduction in the content of the rules and some key changes from the existing SRA Accounts Rules.
The SRA has said these changes will be introduced no earlier than autumn of this year. At the annual COFA conference, it was suggested that the final rules will be available to view in mid-2018, together with additional notes and an online toolkit, which will provide more context to the application of the new rules and related areas.
In this edition of COFA Corner, we look at some of the key changes proposed, even as we eagerly await the final rules and supporting guidance.
Changes to the SRA Accounts Rules
There are a number of proposed changes to the accounts rules - too many to cover in this article alone. We shall therefore only consider some of the indicated key changes.
Overall, the proposed new rules are still intended to safeguard client money and apply the following underlying objectives, which are to ensure that:
- Client money is kept separate from the firm’s own money;
- Client money is promptly returned to clients when there is no longer any reason to hold it;
- Client money is used only for its intended purpose;
- There are proportionate requirements for firms to obtain an annual accountant's report.
Definition of client money
While the underlying objectives are the same, the first key change to highlight is the proposed redefinition of client money:
Client money is money held or received by you:
- Relating to regulated services you deliver to your client;
- On behalf of a third party in relation to regulated services you deliver (such as money held as agent, as stakeholder or held to the sender’s order);
- As a trustee or as the holder of a specified office or appointment, such as donee of a power of attorney, court of protection deputy or trustee of an occupational pension scheme;
- In respect of your fees and any unpaid disbursements, if they are held or received before you receive a bill for them.
Regulated services are the legal and other professional services you provide, which are regulated by the SRA. They include, where appropriate, acting as trustee or as the holder of a specified office or appointment.
It will be interesting to see how the supporting guidance notes affect the specified office and appointment roles. Will this provide long-awaited clarity on the continuing ambiguity in relation to money held for the financial duties and obligations under these appointments?
Additional accountant’s report exemption
A further key change, linked to the definition of client money, arises with particular reference to point (d) above.
A practice has the option not to hold funds in a client bank account, if it receives client money only as an advance towards the firm’s fees and for disbursements which the practice will incur. This means the new proposed Rule 12, which covers the requirement to obtain an accountant’s report, may not apply.
Bills of cost and cost transfers
Under the existing SRA Accounts Rule 17.2, a practice may generally issue a bill of cost only once the work has been “properly” done - at the point of completion on a conveyancing matter, for example. Then earmarked client funds may be transferred to the office bank account.
However, a new rule 4.3 proposes that client funds may be used for a bill, whether it is due or not, once a bill or written notification has been issued to the client or paying party.
The word “properly” is no longer included. This is really a compromise: the SRA were previously considering amending the definition of client money, to exclude client money received in advance to cover the costs and disbursements the practice incurs.
This is not intended to allow firms to raise additional bills simply to sweep up residual client balances. No doubt the imminent guidance notes will provide further clarity on residual balances. The notes are also expected to cover donating to charity the residual balances for clients that cannot be traced.
Linked to the current Rule 17 and the transfer of costs is another key rule change, which eliminates the 14-day time limit from when to transfer client funds for earmarked costs to the office bank account.
The new rules indicate that costs transfers should be undertaken promptly, but they do not specify a defined time limit. In practice, firms will, in any event, want to transfer client funds for costs to the office bank account in a timely manner for their own financial management.
Client money receipts
A new proposed Rule 2 states that client money should be paid “promptly” into a client bank account on receipt. The word “promptly” replaces the phrase “without delay” the current rules define this as the same day or next working day.
The word “promptly” is open to interpretation, but its use is intended to allow greater flexibility on when to bank client receipts. This is a welcome change, reflecting the modern banking environment and the lack of local bank branches in many rural locations.
There will no longer be a requirement for LAA funds received in relation to costs (fees and disbursements) to be held in a client bank account. There may have been a requirement to do so under the current Rule 19.
Do the changes mean the COFA can sit back and relax?
Simply put, the answer is no. The rules are less prescriptive, but the changes are a further step into a regulatory environment which is focused on outcomes. The COFA and the managers will still have an important role to ensure the accounting systems and procedures safeguard client money appropriately.
Some fundamental elements of the rules, of course, remain the same, such as:
- Undertaking the three-way reconciliations of client funds every 5 weeks;
- The prohibition on using a client account to provide banking facilities;
- The criteria for the setup of a client bank account;
- Appropriate authorisation of client-account withdrawals. They are only made in relation to a specific client for the intended purpose - and providing sufficient funds are held on their behalf;
- Duties to correct breaches of the rules promptly, when they are discovered;
- Certain requirements surrounding accounting systems and retaining records.
What the changes to the Accounts Rules do allow is greater flexibility in setting the systems and procedures which are appropriate to the law firm, without having to adhere to such prescriptive requirements.
The additional guidance notes, toolkits and the final rules are expected to provide greater clarity and details on the changes and how they will apply in practice. COFAs and managers can then consider them in more detail.
First published in the Mar/Apr 2018 issue of Legal Abacus Magazine. COFA Corner is written by Jason Mitchell, Partner – Legal Sector Specialist at Francis Clark LLP
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. While 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.