In line with GDPR, there will be another big change to the legal sector coming into play yet again on the 25th day of a month!
The new SRA Accounts Rules come into force on 25th November 2019, along with ongoing and continued associated guidance notes from the SRA. Whilst these new Rules have been streamlined significantly, we should not lose sight of the key principles, which are very much keeping client monies separate from the firm’s money, returning clients’ money promptly at the end of a matter and only using client money for its intended purpose.
OPPORTUNITIES AND ACTIONS
There could also be opportunities for law firms to consider as follows:
Third party managed accounts where the SRA will allow client monies to be held at a bank in the name of a third party. Whilst there is strict criteria for the providers of this service, there is no restriction on the types of monies that can be held. In this respect, firms should consider any benefit from the efficiencies, against whether there is a loss of control, by contracting out these services;
Possibly more attractive rates of interest can be achieved given that the new 2019 Rules simply state that “client money is available on demand unless you agree an alternative arrangement in writing with the client….”! This should suggest an added flexibility on how client monies are banked. As such, a review of products available that attract higher rates of interest in breakable deposits and other opportunities for holding large amounts of long-term deposits will no doubt be worthy of review. I do not pretend that we are going back to the good old days of the higher levels of client account interest received, but many firms will be grateful for even marginal gains in this area;
Firms will need to be updating their own systems notes and ensuring processes are fully understood by Accounts teams around these changes and particularly the definition regarding prescriptive timelines in respect of transfer of costs, banking cheques etc, which were previously required to be “without delay”, but this is now replaced with “promptly”. The SRA acknowledge that this requires the exercise of judgement, but we recommend that the aforementioned systems and internal processes documentation stipulate the definition of “promptly” in respect of all areas where there was previously a prescriptive timeline;
This again should encourage firms and their Reporting Accountants, which I have supported for a number of years, to communicate with each other well in advance of not just the impending 25 November start date, but also the next Accounts Rules review carried out by your appointed Reporting Accountant to ensure there is no expectation gap;
Finally, the COFA finds him or herself with the wider responsibility of reporting, or at least consideration of reporting, breaches to the SRA. This is another reason why this messaging should be communicated very well internally.
TOO PRESCRIPTIVE OR NOT?
The SRA have decided to “strip out overly prescriptive Rules that don’t benefit the public”. I can understand this statement, although no member of the public (well, next to no member of the public) would have ever looked at the Client Account Rules.
The prescriptive nature would not have been intended to benefit the public directly, but by providing the Solicitor, their Cashier teams and Accounts team detailed guidance on how to keep client money safe, this does benefit the public. This knowledge of the previous prescriptive Rules must not be lost and systems notes must in many respects replace these so that the expertise is not lost once Cashier team members move on.
A CONTINUING FOCUS ON RESIDUALS
The focus on Residual Balances is absolutely clear from the SRA; as they describe “the need to return client money as soon as the solicitor has no need to keep it”. We have been advising firms for a long while now that this is a hot topic of the SRA, and rightly so.
The existence of Residual Balances can be the result of ineffectual file closing procedures, and that brings commercial and claim risks on to the firms. If this element of that process is not being dealt with correctly, what else isn’t – time sensitive claims, filings, deadlines?
Historically, Residuals were almost accepted as a natural consequence of any transaction; an accounting tidy-up that hasn’t been completed correctly and no loss to the client. It is not a consequence that should sit well within any law firms. It’s not their money.
Residuals can also be a sign that a firm is perhaps having its client account used as a “bank account” for the client without the existence of underlying transactions; again this has always been wrong but being purposely left in the new SRA Account Rules also gives it further emphasis, and rightly so.
The change a couple of years back to requiring the Reporting Accountant to exercise their professional judgement dovetails nicely with these new Rules, as the SRA quoted that they “have put more trust in solicitors’ professional judgement, while keeping those Rules that really make a difference in terms of keeping client money safe”.
SUGGESTIONS FROM THE REPORTING ACCOUNTANT
In line with the Reporting Accountants responsibilities and solicitors’ professional judgement, I believe it is imperative for any law firm looking to maintain adequate controls over keeping client money safe, that the following are observed:-
Breaches Register – maintained correctly, use this to advertise your robust and timely dealing with breaches. This should also assist the COFA in dealing with their own vital and enhanced reporting obligations. Documentation of thought process is key here.
COFA – Three-way reconciliation – evidence of timely COFA review and any differences investigated and shortfalls made good.
Residual Balances – as mentioned above, these are found in too many practices so devote time and resources to sort these out before the SRA force you to!
Systems & Controls recorded in detail and followed, including file closing (deals with ensuring no future Residual Balances).
Empower your Finance/Cashier team to not only record breaches but ultimately liaise with the COFA regarding reporting to the SRA if required, and to actively control all partners and fee earners to ensure your processes designed to keep client money safe are being followed and how the firm will deal with repeat offenders.
Use the (soon to be) Old Rules as a basis for looking at your internal processes. The SRA deem them too prescriptive, but they form a tremendous basis and backstop for those Systems and Controls to ensure client money is looked after. If you adopt a defined “promptly” as the same timescales as “without delay” you probably will not go wrong.
If your Accountant’s Report is qualified or the accompanying management letter from the Accountant makes suggestions, deal with them. If matters are left unresolved that hardly gives the impression of a firm dealing appropriately with client money and taking responsibilities seriously.
In summary, there are many positives in the changes, but with outcome focused regulations generally, systems and controls need to be not just well documented but robustly adhered to and monitored regularly internally so that inherent unwanted risks to the practice are kept fully under control.
Further updates for COFA’s responsibilities will be provided in due course.