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Recent changes to the rules governing solicitors' client accounts could cause trouble for law firms and the accountants who prepare regulatory reports on their accounts. Steve Collings highlights the main differences.
Many accountants will act as reporting accountant for solicitor clients who operate client accounts. In this role they will prepare the accountants report and checklist that is submitted to the Solicitors Regulation Authority (SRA) no later than six months after the client’s year-end.
In October 2011, the Solicitors Accounts Rules (SARs) were changed considerably to be more “outcomes-focused”. Solicitors must get to grips with the new regime to ensure they are following their rules properly and reporting accountants need to know the rules to spot breaches and prepare the accountants’ report and checklist.
The SARs were previously published as part of Edition 1 of the Handbook issued by the SRA which came into effect on 6 October 2011, however they now form part of Edition 2 of the Handbook which was published, and came into effect on, 23 December 2011.
The first thing solicitor clients and reporting accountants need to understand is what exactly “outcomes-focused” entails. An outcomes-focused approach focuses on high level principles and outcomes that drive the provision of services to clients. The SRA has defined what an outcomes-focused approach IS and what an outcomes-focused approach is NOT:
An outcomes-focused approach IS:
Designed to enable you to put clients first, where this does not prejudice the public interest
About achieving the right outcomes for clients
A move away from the prescriptive rules wherever this is appropriate.
An outcomes-focused approach is NOT:
A tick-box approach to regulation
A “one-size-fits-all” approach to regulation.
Reporting accountants need to be aware that solicitor clients follow high level principles that are set out in the ‘Handbook’ and apply to all aspects of practice. These principles must be applied by solicitors, but the SRA identified a number that are particularly relevant to the SARs. The SRA stipulates that a solicitor and a firm must:
Protect client money and assets
Act with integrity
Behave in a way that maintains the trust the public places in the solicitor and in the provision of legal services
Comply with legal and regulatory obligations and deal with regulators and ombudsmen in an open, timely and co-operative manner; and
Run the business or carry out a role in the business effectively and in accordance with proper governance and sound financial and risk management principles.
It is worth mentioning that the SARs now refer to you rather than the solicitor. This is to acknowledge the fact that the rules apply to all those who carry on work in a firm as well as to the firm itself.
When a law firm applies these principles, the SRA would expect to see the desired outcomes that:
Client money is safe
Clients and the public have confidence that client money held by firms will be safe
Firms are managed in such a way, and with appropriate systems and procedures in place, so as to safeguard client money
Client accounts are used for appropriate purposes only; and
The SRA is aware of issues in a firm relevant to the protection of client money.
The SARs themselves are split into eight parts with each part containing a number of rules. In total there are 53 Rules.
The new rules contain a considerable number of changes to the previous rules and some of the more notable changes are as follows:
Rule 1: Keep client money safely
Rule 2(1): Separate guidance
Rule 14: Banking facilities prohibited
Rule 21: Electronic withdrawals
Rule 22: Interest payments and calculations
Rules 29 and 30: Electronic statements
Matters affecting reporting accountants
There is no denying that the SARs are complex and create the potential for unintentional breaches. The full article details some of the traps that reporting accountants should be aware of.