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SRA Issues Response to Consultation on Accounts Rules

By Julia Penny

The Solicitors’ Regulatory Authority (SRA) issued a response to its consultation on the next stage of development in the accounts rules requirements. The SRA aim to create a shorter, sharper, clearer Handbook with a revised set of principles and codes, together with updated Accounts Rules. Overall, they are trying to remove rules or requirements that seem to achieve little or nothing and just drive up the costs of compliance. One example they gave was a sole practitioner in a rural area having to drive to the bank several times a week to ensure that cheques from clients are deposited within 48 hours, whether this achieved an important objective for the firm or their client or not.

The SRA point out in their response that “all good solicitors know that they should not steal money belonging to their clients” and they don’t therefore need 40 pages of rules telling them how to avoid stealing. My view on this would be that it is slightly simplistic, because of course the rules are laying out expected procedures that help to ensure the money can’t be stolen or that it is swiftly noticed if it is stolen. This is not the same as 40 pages of rules saying “don’t steal”.

Some of you may remember that the consultation to which this is the response, suggested that client money should cease to include amounts paid in advance for disbursements, such as barristers’ fees. This proposal received the most number of comments with firms saying that they would have to change their systems to cope with a change in the definition of client money and this would not benefit either them or the client. In particular, if advance fees were office money as proposed, then VAT would be due earlier than at present, with all the consequent upheaval in systems.

The response also mentions what was surely a concern for many, that money paid to the firm to cover items such as barristers’ fees would be more at risk of loss, for example if the firm went bust, and could have huge negative consequences on the ultimate client. Some firms responding to the consultation said they felt they would need a separate trust account for such monies in any case.

The end result of this, is that the revised definition still generally treats money paid in advance for fees or disbursements to be client money. However, there is an additional exemption, so that where the only client money is such advance payment of fees/disbursements for which the firm is liable, that money does not need to be held in a client account. Additionally, a rule exempting payments from the Legal Aid Agency from being held in a client account has been introduced.

On top of the changes in definition of client money, the SRA have removed the requirement for all firms that cease to hold client money to obtain a final accountant’s report. Instead, the SRA will have the right to require a report, if they think it necessary in order to ensure a proper close down of the client account. This will clearly relieve firms of an additional burden, although it will be interesting to see how often the SRA requires such a report, or what information they use to judge whether one should be required.

One other important development is that solicitors will be able to use Third Party Management Accounts (TPMA), to relieve the firm of the burden of running their own client money accounts. Whilst not many TPMA products exist, the SRA hope that more will be available, now that they are permitted and do not meet the definition of client money.

As well as the above changes, the Accounts Rules overall will be simplified, which, perhaps surprisingly, raised some concerns. The new rules mean that judgement will be required, for example on how many days before banking takes place, dependent on the firm’s circumstances. This should mean that procedures are more proportionate, but it also requires more thought on what is appropriate for each firm.

The new draft rules are available here and are still subject to minor alteration before their eventual approval and issue as final. 

August 2017 

 

Disclaimer
This article is published with the understanding that SWAT UK Limited is not engaged in rendering legal or professional services. The material contained in this article neither purports, nor is intended to be, advice on any particular matter. This article is an aid and cannot be expected to replace professional judgment. SWAT UK accepts no responsibility or liability to any person in respect of anything done or omitted to be done by any such person in reliance, whether sole or partial, upon the whole or any part of the contents of this article.

 

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