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A Short Guide to the New SRA Accounts Rules

A much simpler set of Accounts Rules

A much simpler set of Accounts Rules will come into force in November 2019, and will for the first time give firms, managers and sole practitioners considerable flexibility on how they go about complying and dealing with client money.

A much simpler set of Accounts Rules will come into force in November 2019, and will for the first time give firms, managers and sole practitioners considerable flexibility on how they go about complying and dealing with client money.

The changes over time are substantial. In 1998 we had 50 pages of prescriptive detail enforced with rigidity by the Office for the Supervision of Solicitors and then for a short time by the SRA before it introduced its own slightly slimmed down 2011 Rules. Change since then has accelerated and there is no doubt that accounting life will be much easier from 2019. Now we have only 7 pages, but it’s still regulated and public protection and professional reputation remain paramount.

The new rules need to be read in conjunction with a new set of Principles to come into force at the same time. A sufficiently serious breach of the Accounts Rules will engage one or more Principles, but that has been the position for years so nothing new there. When dealing with money you must still act:

  • in a way that upholds public trust and confidence in the solicitors’ profession and in legal services;
  • with independence; with honesty;
  • with integrity;
  • in the best interests of each client.

So what is new?

  1. Firms will need to have systems and controls in place to ensure compliance, but ones which are appropriate to the nature and volume of client transactions and the amount of money held or received. This gives firms flexibility on how they choose to implement and monitor compliance. In other words, we can exercise professional judgment taking account of the work type and sums of money involved. We are in many ways a more diverse profession than ever with increasing numbers of small specialised practices which do not hold significant sums of transactional client money. It is therefore entirely appropriate that we should be free to judge how best to safeguard client money.
  2. The Rules impose joint and several liability on the part of Managers for compliance by the firm, its managers and employees. It’s not an entirely new concept because partners and owners have long been strictly liable for breaches, but it is now set out explicitly.
  3. The definition of “client money” is revamped and set out in Rule 2.1. If it satisfies the definition it must go into a client account.  Client money is money held or received by you:
      1. relating to regulated services delivered by you to the client;
      2. on behalf of a third party in relation to regulated services delivered by you;
      3. as a trustee or officeholder;
      4. in respect of your fees and any unpaid disbursements held or received prior to delivery of a bill.
  4. Rules 2.1 (a) and (c) highlight the link between client money and delivery of a regulated service. The SRA has been very concerned with money laundering and the mischief of client accounts being used for the provision of banking facilities. In short, if the money received or held has no connection with the provision of a regulated service, it is not client money and should not be in client account. On top of that Rule 3.3 explicitly prohibits the provision of a banking facility through client account to clients or third parties, and also emphasises the need to connect transfers or withdrawals with the delivery of a regulated service. Rule 2.5 requires you to ensure that you don’t hold client money for longer than you need to.

There is nothing particularly complicated in any of this.

  1. You may no longer need a client account at all, and this is new. Rule 2.2 (a) provides that if the only client money you hold or receive falls within Rule 2.1 (d) above and – (a) any money held for disbursements relates to costs or expenses incurred by you on behalf of your client and for which you are liable, and (b) you do not for any other reason maintain a client account;You are not required to hold it in a client account if you have informed your client in advance of where and how the money will be held. Furthermore Rule 2.2 (c) allows you to agree alternative arrangements in writing with the client. For those practices where money has hitherto been held in client account “on account of costs and disbursements” the need for a designated client account could disappear altogether.
  2. Third Party Managed Accounts. Rule 11.1 permits you to enter into arrangements with a client to use third-party managed account for the purpose of receiving payments to and from or on behalf of clients in respect of regulated services. The client must be informed and must understand the nature of the contractual arrangement you have with the third-party, and there are some obvious safeguards ultimately targeted at ensuring that client money is protected.

What is not new?

  1. The need to keep and maintain accurate, contemporaneous, and chronological records in client ledgers showing dealings with client money;
  2. That you carry out a reconciliation at least every five weeks;
  3. That you obtain at least every five weeks statements from the bank or building society;
  4. That the account is open with a bank or building society in England and Wales;
  5. That any breaches are rectified promptly on discovery;
  6. That within six months of the end of an accounting period you deliver an accountant’s report to the SRA. There is no requirement to do this if the amounts of money passing through client account fall below the threshold is specified in rule 12.2. This threshold exemption is very useful. Even if its exceeded it may be possible to obtain a waiver;
  7. You must store and retain accounting records securely for at least six years
    The is much that is familiar and some that is refreshingly new. As long as client money is safeguarded, client account is properly used and you behave honestly and with integrity none of the new Rules should be difficult.

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