In March 2019, the Solicitors Regulation Authority (SRA) announced amendments to the SRA Accounts Rules which are due to take effect from 25 November 2019. Steve Collings outlines the major changes.
The SRA has removed many of the prescriptive rules in an attempt to reduce the burden on solicitors and law firms and allow solicitors greater freedom to use their professional judgment in considering how they meet the standards.
The overarching objective of the amendments is a simpler set of rules which focus on the principles of keeping client money safe as opposed to lots of specific technical rules. However, there will need to be some guidance issued by the SRA as to how certain aspects of the revised rules will be applied.
The SRA has said that it will issue some guidance and (potentially) some ‘toolkits’ to aid application of the rules but, at the time of writing, it was uncertain as to when the SRA will issue this guidance. After consulting with the SRA at a recent conference, it intimated that guidance on ‘key areas’ will be issued over the summer.
The impact of the new rules will affect the vast majority of solicitor clients, although it is not expected that significant changes will have to be made across the board within firms.
Solicitor clients should be aware that the rules take effect from 25 November 2019, which is later than was originally planned (the original 'effective from' date was April 2019 but this was delayed until 25 November 2019 to give firms time to plan).
Structure of the revised rules
The revised structure of the rules is shown in the following table:
|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
Changes coming into effect on 25 November 2019
The following highlights some of the main changes to the SRA Accounts Rules:
Responsibility for compliance
Rule 1.2 states that the ‘authorised body’s managers’ are jointly and severally responsible for compliance by the authorised body, its managers and employees, with the SRA Accounts Rules. At the consultation stage, the proposal was that it would be the COFA and the firm’s managers that would be jointly and severally responsible for compliance.
Expenses incurred on a client’s behalf
There is an optional exemption in rule 2.2 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 (rule 2.2(a)) and the firm does not for any other reason maintain a client account (rule 2.2(b)), such money can be paid into the office account.
In practice, it is quite rare for a firm not to operate a client account where client monies of any description are received.
Care must be taken with this optional exemption because it is intended to only apply to those firms which do not wish to operate a client account where this is the only type of money they hold. The exemption does not apply to a 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.
Definition of ‘client money’
The proposed definition of client money in the original proposals received widespread criticism, which the SRA has taken on board. Rule 2.1 of the SRA Accounts Rules 2019 states:
‘Client money is money held or received by you:
- relating to regulated services delivered by you to a client;
- 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);
- 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 held or received prior to delivery of a bill for the same.’
The effect of (d) above 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.
In addition, the rule infers that the firm must include paid disbursements on a bill prior to transferring monies from client account to cover those disbursements.
It should also be noted that the definition of client money now includes monies received as:
- trustee; or
- holder of a specified office or appointment, such as:
- a donee of a power of attorney;
- Court of Protection deputy; or
- trustee of an occupational pension scheme.
These monies must be paid into the client account unless to do so would conflict with the requirements of that office or appointment.
It should also be noted that there is no longer any distinction between ‘disbursements’ and ‘professional disbursements’. The SRA glossary defines a ‘disbursement’ as follows:
‘means any costs or expenses paid or to be paid to a third party on behalf of the client or trust (including any VAT element) save for office expenses such as postage and courier fees.’
Legal Aid Agency payments
Legal Aid Agency payments no longer have a specific rule and hence can be placed in the office account.
Third Party Managed Account (TPMA)
There is an option to operate a TPMA, although some criteria must be met before such an account is operated.
The SRA Glossary defines a TPMA as follows:
‘means an account held at a bank or building society in the name of a third party which is an authorised payment institution, a small payment institution that has chosen to implement safeguarding arrangement in accordance with the Payment Services Regulations or an EEA authorised payment institution (as each defined in the Payment Services Regulations) regulated by the FCA, in which monies are owned beneficially by the third party, and which is operated upon terms agreed between the third party, you and your client as an escrow payment service.’
Rule 11.1 and 11.2 deal with TPMAs. Rule 11.1 states that the solicitor can use a TPMA only if:
‘(a) use of the account does not result in you receiving or holding the client’s money; and
(b) you take reasonable steps to ensure, before accepting instructions, that the client is informed of and understands:
(i) the terms of the contractual arrangements relating to the use of the third party managed account, and in particular how any fees for use of the third party managed account will be paid and who will bear them; and
(ii) the client’s right to terminate the agreement and dispute payment requests made by you.’
Rule 11.2 requires the solicitor to obtain regular statements from the provider of the TPMA and ensure that these accurately reflect all transactions on the account.
Rule 17.5 of the SRA Accounts Rules 2011 required a payment for an ‘agreed fee’ to be paid into the office account on receipt. The concept of ‘agreed fees’ has been removed in the 2019 rules and hence all such fees must be paid into the client account. This change is likely to affect many firms.
Client account reconciliations
There have been no changes made to the frequency of the client account bank reconciliation process. Rule 8.3 still requires the client account bank reconciliation to be completed at least every five weeks (or more frequently).
However, Rule 8.3 specifically requires the COFA or a manager of the firm to sign off the client account bank reconciliation. Differences on the bank reconciliation must be investigated and resolved promptly.
It is noted that the term ‘promptly’ appears quite frequently in the rules and guidance on how this should be interpreted is expected from the SRA.
In addition, ‘client’s own accounts’ are presently subject to limited record keeping and requirements.
Rule 10.1(b) brings a client’s own account in scope of Rule 8.3 which requires client accounts to be reconciled on at least a five-week cycle. Such accounts are usually held outside client ledgers and so it is currently unclear what these accounts are to be reconciled to.
There is no reference to the existing £500 de minimis limit in respect of making payments of residual balances to a charity without the need for prior approval from the SRA.
The SRA Accounts Rules 2011 provided a lot of guidance in the form of ‘guidance notes’. This guidance has been removed in the 2019 rules.
As noted in the introductory section of the article, the SRA has now confirmed that guidance will follow over the next few months for both the SRA Accounts Rules and the practical application of the SRA principles but no dates have yet been announced.
The effective date for the new rules is 25 November 2019 and therefore where a client’s reporting date straddles 25 November 2019 there will be two versions of the rules to consider.
For example, where a client has a 31 March 2020 year end, the period 1 April 2019 to 24 November 2019 will be covered by the SRA Accounts Rules 2011, and the period 25 November 2019 to 31 March 2020 will be covered by the SRA Accounts Rules 2019.
Therefore, the planning phase of the assignment will have to cater for both sets of rules.