The ILFM work with the Solicitors Regulation Authority (SRA) to receive updates and priorities that we can impart to our members. Going forward, the SRA’s focus is to:
- Deliver high professional standards.
- Strengthen its risk based and proactive regulation.
- Support innovation and technology.
- Be an authoritative and inclusive organisation, meeting the needs of the public, consumers, those we regulate and our staff.
Client Money and Continuing Competence
The risks associated with holding client money are that a law firm is more likely to report regulatory breaches. The SRA and your compliance officers will know that some areas of law are more at risk of serious breaches that may lead to a qualified report, particularly in personal injury and conveyancing.
The SRA said that it was important law firms are aware of these challenges and address them. Prevention is better than cure, or the negative impact on a firm’s reputation and consumer trust, as well as problems gaining professional indemnity insurance.
Reasons for a Qualified Accountant’s Report (QAR)
More often than not, law firm owners cannot envisage the impact and consequences that an SRA investigation can have on its staff and overall reputation. Where does the source of the investigation come from? An ex-employee, a current whistleblower, or a complaint from a client are some normal scenarios, as well, of course, from a Qualified Accountant’s Report.
SRA Accounts Rule 12 must be adhered to and understood by the law firm, legal finance team and COFA. Reporting Accountants will also know this rule, which complements Rule 1.2 that states “The authorised body’s managers are jointly and severally responsible for compliance by the authorised bodies, its managers and employees with these rules”.
When it comes to planning for and completing an accountant’s report, it is up to the reporting accountant (RA) to determine whether a report should be qualified or not. Compliance Officers in a legal practice should be aware that a RA is under a statutory duty under Section 34 of the Solicitors Act 1974 and section 5, schedule 2 of the Administration of Justice Act 1985, to immediately report to the SRA:
- any evidence of theft or fraud in relation to money held by a solicitor or a law firm for a client or any other person or in a client account or an account operated by the solicitor; and
- if they have concerns about whether a solicitor or a law firm is fit and proper to hold money for clients or third parties or operate any such accounts.
Ultimately, is the law firm’s client money properly safeguarded?
These include a significant and/or unreplaced shortfall as well as a failure to provide documentation requested by the RA.
Definitive and applied systems and controls, proper management and an understanding of the Accounts Rules are required to avoid a QAR together with the possibility of an SRA investigation.
The SRA are looking at these factors when it comes to compliant client money accounts:
- Poor controls
- Suspense accounts
- Debit balances
- Credits on the business account
- Unrectified differences
- Residual balances
The SRA highlighted the concerns they had, such as seeing that there is a limited understanding about the importance of Accountants Reports, no engagement with the Reporting Accountant, late submissions, or even no submissions at all.
Forensic Investigations by the SRA
Sean Hankin, Head of Forensic Investigation and Intelligence at the SRA, as well as a Chartered Accountant, will be speaking at the ILFM’s Spring Conference in May 2024 at the Law Society.
The theme from Sean and his team focuses on:
- Firms in financial difficulties
- Poor or no books of account
- Breaches of AML Regulations
- Vendor fraud
The summary from the SRA is telling law firms that needs to work on innovation and best use of technology, together with continued professional development and training. This is imperative for legal finance and compliance officers as they are key to protecting client money and a law firm’s reputation.
The ILFM’s training schedule can be seen HERE.