The new SRA Accounts Rules went live on 25 November 2019. For most law firms, they will not represent a significant change, as Jonathan Angell, head of legal services for FINEX at Willis Towers Watson, explains
The focus of the rules remains the protection and security of client money while requiring more accurate client account management and record keeping. The SRA is allowing law firms more flexibility in meeting the requirements by removing the need for prescriptive application and focusing on outcomes, and using clearer, simpler language within the rules themselves with a view to aiding application.
Some of the previously acknowledged accounting safety nets, including the use of suspense ledgers, have been removed. It is anticipated that commentary on these will reappear in SRA supporting guidance.
Those responsible for financial management within law firms should consider and review existing policies and procedures to ensure their efficacy and to ensure that all essential accounting staff receive training in the following areas.
Client money must be kept separate
Rule 4.3: Before transferring money from client to office account to pay costs (this now includes disbursements) “you must give a bill of costs, or other written notification of the costs incurred, to the client or the paying party”.
Presumably, the SRA’s purpose here is to ensure that clients are fully aware of the amount on their individual accounts, they understand clearly what disbursements and costs have been paid and to avoid the risks of any potential shortfalls on the client ledgers later in the transaction.
Firms need to ensure that clients are notified about costs to be paid prior to the monies actually being transferred from the client account to office account. This may be achieved by issuing interim bills, or the final bill of cost to clients or the paying party or other written notification of the costs to be incurred.
Client accounting systems and controls (COFA)
Rule 8.3: The additional requirement is that the five-weekly client account reconciliation must now be signed off by the COFA or a manager of the firm.
The SRA is clearly concerned that within some law firms the responsibility is delegated and therefore managers or the COFA may not be overseeing and understanding the reconciliation. The COFA or manager will not be able to claim ignorance for any discrepancies if they have signed off the reconciliation.
This is a relatively easy rule to comply with, and an audit trail should exist to demonstrate that the reconciliation has been signed off by the COFA or a manager. It should be noted that it is only the five-weekly reconciliation that needs to be signed. If you are conducting reconciliations more frequently then there is no requirement (under the rules) for those reconciliations to be signed off, although it is considered best practice to do so.
It is also suggested that it would be considered best practice that the reconciliation should be signed and dated at the time that the reconciliation is undertaken.
Client accounting systems and controls
In addition to the reconciliations being signed off, Rule 8.3 provides that any differences shown in the reconciliations be promptly investigated and resolved.
At the 2019 LegalEx event, the SRA commented that it was concerned that any discrepancies on reconciliations were not being investigated and resolved, and that such differences were often rolled over from one reconciliation period to the next without ever being investigated or resolved.
Evidencing that you have identified the discrepancy and then documenting what steps you have taken and any decisions you have made to resolve the discrepancies will ensure compliance with this rule.
Client money and client accounts
Rule 2.5: Ensure that client money is returned promptly as soon as there is no longer any proper reason to hold those funds.
To ensure that client monies are returned to clients at the end of the matter and are not held on client ledgers indefinitely to avoid the risk of client accounts being used as banking facilities.
There is almost certainly a wider concern here around money laundering and ensuring that firms are not being treated as banks by clients and ensuring that there is always an underlying legal transaction behind monies being held on a client account.
File closing procedures should demonstrate that attempts are made to return any funds at the end of the transaction to the client. It should be clear whose responsibility this is, which may be the fee earners or the accounts team.
It is inevitable that some monies will not be able to be returned to clients immediately. Again, the key is demonstrating attempts to comply with the rules and documenting what actions have been taken.
Rule 2.5: Ensure that client money is returned promptly as soon as there is no-longer any proper reason to hold those funds; and
Rule 5.1(c): You may only withdraw client money on the SRA’s written authorisation or in prescribed circumstances.
On 10 October 2019, the SRA provided a mandatory statement on what constitutes “prescribed circumstances”. The prescribed circumstances are very similar to the detail previously provided under Rule 20 of the SRA Accounts Rules 2011.
The limit of £500 remains, as does the requirement that the monies are paid to charity and that reasonable steps are taken to trace the rightful owners. You still need to maintain records of the steps taken and keep a detailed central register of payments made: to include the name of the rightful owner, date of payment, amount paid, name of the charity, their charity number and receipts from the charity.
The differences between the 2019 and 2011 rules are:
- Your reporting accountant will be expected to report on compliance with your recording of the steps taken, and the central register;
- Guidance is provided on tracing clients, and reasonable steps in tracing clients are based on specific factors including the age and amount of the residual balance; and
- No costs incurred in tracing clients can be deducted from the residual balance
Removing the specific details in this area is presumably further evidence of the SRA looking for firms to exercise, explain and document their judgement, a theme that flows throughout the rules.
While it is right that monies are promptly returned to clients, some residual balances are an inevitability because of the nature of the transaction, for example, retention monies.
Robust and documented file closing procedures will assist in demonstrating compliance in this area.
Ensure that regular audits are conducted to identify any residual balances, and an agreed documented process exists to resolve them.
Maintain detailed records of steps that have been taken to return residual balances, taking note of the SRA’s additional guidance on making use of social media, Companies House, etc.
Should residual balances occur frequently then investigate the cause and consider appropriate additional steps to prevent them from occurring.
If the amount exceeds £500 on any one client matter then you will need to apply to the SRA for authority before transferring the money from the client account.
In line with the SRA’s approach that client monies be accurately recorded, the provision for a suspense ledger has been removed. Suspense ledgers were permitted under Rule 29.25 of SRA Accounts Rules 2011.
The SRA is eager to ensure that accurate records are kept and maintained, with any client monies received correctly allocated. However, the guidance issued from the SRA on planning for and completing an accountant’s report provides that in circumstances when suspense ledgers are required, this should be for temporary items only such as an unidentified receipt.
You can demonstrate compliance in this area through only occasionally using suspense ledgers, and when you do, by promptly investigating the source and purpose of the monies received. You must maintain records of what attempts have been made to correctly identify and allocate the monies, and document all decisions made.
Suspense ledgers that roll over from one reconciliation period to another, with limited attempts to clear them, are likely to be viewed as poor practice.
Duty to correct breaches upon discovery
Rule 6.1: You correct any breaches promptly upon discovery.
The difference from the previous rules is that the prescriptive timescales for resolving matters have now been removed. The SRA appears to be leaving this decision to the firm and allowing them to exercise judgement.
The presence of a breach register would be a useful tool here, with firms documenting when and how breaches occurred, when and how they were resolved and the decision-making process and rationale behind them.
It seems evident that the decision on when to resolve, (if not resolved immediately) should be based on the impact to the client of the breach. Factors to consider might include when the matter is due to complete and the sum involved.
Any breach register would also benefit from a regular high-level review, to help identify any patterns and trends in the types of breaches, reasons behind them and resulting changes in procedures. This may highlight any training issues or something more significant. Having such measures in place is likely to reassure the regulator.