On 13 June 2017, the Solicitors Regulation Authority (SRA) announced further changes to its handbook. The changes follow extensive consultation, and the first phase has now been announced. This will include creating shorter, clearer principles and codes, as well as simpler accounts rules. Steve Collings reports.
What is the purpose of the changes?
The SRA concluded that the current rules are too complex and overly-prescriptive which, in turn, creates logistical problems for some firms to be compliant. SRA Accountant’s Reports are frequently qualified by accountants for technical breaches of the rules: for example if the bank had incorrectly credited bank interest to the general client account.
While the SRA has simplified the rules previously, allowing reporting accountants to use their professional judgement in determining whether a breach is material (which results in a qualified report), a lot of reports are still qualified due to the prescriptive nature of the accounts rules.
The SRA feels that they need to put more trust in a professional solicitor’s judgement, hence pages of prescriptive rules is no longer deemed necessary. The SRA has also acknowledged that all good solicitors know that they should not steal money which belongs to clients!
The third phase of the SRA’s consultation was announced on 1 June 2016 and proposed some significant changes. It is fair to say that some of these changes were not supported. In particular, the Law Society was uncomfortable with the SRA’s proposed treatment of on-account costs and certain disbursements being treated as office money as opposed to client money. Where the SRA’s proposed change to the definition of ‘client money’ was concerned, it was broadly negative.
Structure of the draft SRA Accounts Rules 2018
In creating the simpler accounts rules, the SRA has slashed the page count from 41 down to just seven pages (containing 13 rules). The idea of this major reduction in the rules is so they focus on keeping client money safe.
The structure of the draft SRA Accounts Rules 2018 is as follows:
|Part 1: General
Rule 1: Application section
Part 2: Client money and client accounts
Rule 2: Client money
Rule 3: Client account
Rule 4: Client money must be kept separate
Rule 5: Withdrawals from client account
Rule 6: Duty to correct breaches upon discovery
Rule 7: Payment of interest
Rule 8: Client accounting systems and controls
Part 3: Dealings with other money belonging to clients or third parties
Rule 9: Operation of joint accounts
Rule 10: Operation of a client’s own account
Rule 11: Third party managed accounts
Part 4: Accountants’ reports and storage and retention of accounting records
Rule 12: Obtaining and delivery of accountants’ reports
Rule 13: Storage and retention of accounting records
What are the main changes of which accountants need to be aware?
The main changes that reporting accountants need to be aware of are as follows:
Removal of COFA from rule 1.2
Rule 1.2 will now state that the firm’s managers are jointly and severally responsible for compliance. In the rules consulted on by the SRA, the proposal was that the COFA and the firm’s managers would be ‘jointly and severally’ responsible for compliance.
Expenses incurred on a client’s behalf
The SRA has introduced an optional exemption whereby if the solicitor receives money from a client in payment of advance fees and disbursements (eg counsel’s fees) for which the firm is liable, this money can be paid into the office account.
This treatment is optional and is intended to apply to those firms which do not wish to operate a client account where this is the only type of money they hold.
This optional exemption does not apply to any firm which receives money from clients or third parties (eg a house deposit, stamp duty land tax etc). Hence, monies received in advance of fees and disbursements must continue to be paid into the client account.
Cease to hold reports
Under the current rules, where a firm stops holding or receiving client money the SRA requires a final accountant’s report to be obtained, and this must be delivered to the SRA regardless of whether it is qualified or not.
The overarching objective of this ‘cease to hold’ report is to ensure that when a firm shuts down or closes its client account, the SRA is confident that all client money has been dealt with properly in accordance with the rules.
The changes to this requirement are that the SRA will only require firms to submit a cease to hold report when a firm shuts down and closes its client account on a case-by-case basis, where the SRA believes this is necessary. The SRA will issue guidance for the criteria and relevant risk factors they use when making their decision.
Legal Aid Agency payments
The SRA has introduced a rule which exempts payments from the Legal Aid Agency from being held in the client account.
Revised definition of client money
The original proposals to change the definition of ‘client money’ received widespread criticism, which the SRA has taken on board in the revised definition. Draft rule 2.1 says
‘Client money’ is money held or received by you:
a)relating to regulated services delivered to you by a client;
b)on behalf of a third party in relation to regulated services delivered by you (such as money held as agent, stakeholder or held to the sender’s order);
c)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;
d)in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same.’
The effect of rule 2.1(d) means that money received in advance of services where no bill has been raised is still client money and must be placed in the client account.
The term ‘regulated services’ is a new term introduced by the SRA and is defined as follows:
‘Regulated services means the legal and other professional services that you provide that are regulated by the SRA, and includes, where appropriate, acting as trustee or as the holder of a specified office or appointment.’
Fees in advance of services rendered
Rule 17.2 in the 2011 version of the SRA Accounts Rules says:
‘If you properly require payment of your fees from money held for a client or trust in a client account, you must first give or send a bill of costs, or other written notification of the costs incurred, to the client or paying party.’
The words ‘properly require’ stops the solicitor from raising a bill of costs for work which has not been carried out.
Rule 4.3 in the draft SRA Accounts Rules 2018 states that where a firm is holding client money and some, or all, of that money will be used to pay the firm’s costs, the firm:
- must give a bill of costs, or other written notification, to the client or paying party;
- this must be done before any transfer from a client account is done; and
- any such payment must be for the specific sum identified in the bill of costs/other written notification and covered by the amount held for the particular client or third party.
Taken at face value, this means that it would be permissible for a solicitor to transfer money from client account to office account where a bill has been rendered for on account payment of costs (ie in advance of services). This is because the words ‘properly require’ have not been carried over into rule 4.3
When will the new rules be effective?
It is expected that the new rules will become effective in Autumn 2018. Prior to that, there will be a further consultation process with the scope for additional changes to be made before the finalised version of the SRA Accounts Rules 2018 are presented for approval by the SRA Board.
The SRA has slashed the SRA Accounts Rules, which is expected to be broadly welcomed by many reporting accountants who prepare SRA Accountant’s Reports.
However, be warned! This is not the end – the SRA has said that they intend to publish additional guidance on the correct interpretation and application of the new rules, which will need to be read in conjunction with the new rules.
This additional guidance will more than likely end up being treated as if it formed part of the rules! The SRA has identified several areas where additional guidance is likely, including:
- requirements to pay interest;
- accounting records and systems;
- residual balances due to a client;
- record keeping where joint accounts are operated;
- operation of a client’s own account;
- use of third party managed accounts;
- waiver provisions;
- withdrawals to make payments to a charity;
- who will be permitted to make withdrawals from the client account;
- accountant’s reports (cease to hold reports);
- what is client money; and
- acting as a trustee and client money.
About Steven Collings
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.