SRA Accounts Rules Review (Consultation June 2016)
The SRA has recently published details of the next phase of their regulatory reform programme which includes a review of the Accounts Rules. This is the third and final phase of proposed changes to the Accounts Rules.
Background of the regulatory reform programme
Phase 1 – Minor changes to the Accountants Report Form, exemptions for firms where 100% of their work is Legal Aid Agency funded and the removal of the requirement to submit reports to the SRA where they are not qualified – implemented October 2014
Phase 2 – Removal of detailed testing and a move to the Reporting Accountant applying a risk based approach to their work with a focus on the risks to client money, further exemptions from the requirement to obtain Accountants Reports for firms handling small amounts of client money – implemented November 2015
Phase 3 – looking more widely at the existing Accounts Rules and making proposals for a broader change – Consultation closes 21 September 2016 – implementation date TBC, but not expected before 2017.
Reasons for the changes
The main drivers for the proposed changes are as follows:
- The current accounts rules have not changed significantly for many years;
- They are prescriptive and restrictive, and focus on ensuring all firms handle money in the same way;
- Many firms find themselves in technical breach of the Accounts Rules in circumstances where there are no real risks to client money.
This suggests that the Accounts Rules are now outdated and are not focussed on the key risks to client money.
1. Simplify the Accounts Rules: by focusing on key principles and requirements for keeping client money safe, including:
- keeping client money separate from the firm’s money;
- ensuring client money is returned promptly at the end of a matter;
- using client money only for its intended purpose;
- proportionate requirements for firms to obtain an annual accountant's report.
The revised Accounts Rules will be supported by an online toolkit which will comprise of guidance and case studies to aid compliance.
2. Change the definition of client money: to allow money paid for all fees and disbursements for which the solicitor is liable (for example counsel fees) to be treated as the firm's money.
3. Provide an alternative to the holding of client money: through the introduction of clear and consistent safeguards around the use of third party managed accounts (TPMA) as a mechanism for managing payments and transactions.
Main changes to the rules
The proposals include a complete overhaul of the rules with a reduction in the number of rules from 52 to only 12, and the remaining 12 will be simplified.
What are the implications for the COFA and Reporting Accountant? Under the current regime there are only 10 main rules that we are required to focus on, those dealing with client money, the operation of a client account and accounting records. Under the new regime there will still be the same focus, although these main rules will be simplified.
A summary of the main changes is as follows:
- A change in the definition of client money: to exclude payments for the firm’s fees and payments to third parties (disbursements) for which the solicitor is liable.
Under the current rules payments received in advance of services rendered and payments received for unpaid professional disbursements or for disbursements that have not yet been incurred are regarded as client money. Under the new rules this will be changed and these payments will be regarded as the firm’s own money and as such will not be paid into client account.
The proposed change in definition allows the SRA to dispense with the current detailed descriptions in the Accounts Rules about different types of disbursements as well as the definition of office money and office account.
- Client money to be paid promptly into client account: a change from the current requirement to bank client money “without delay” (which is defined as on the same or next working day) to a requirement to bank client money “promptly” (promptly is not defined).
- Removal of the requirement to send annual notifications to clients of sums of client money properly retained at the end / substantial conclusion of matters (R14.4): the requirement to return client money promptly as soon as there is no proper reason to retain the funds will still be applicable.
- Simplification of rule 17 (receipts for costs): the requirement that bills/written notifications of costs are sent to clients / paying parties before the funds are transferred from client to office account will remain but there will no longer be a 14 day timescale to make the transfer. The requirement that such transfers are specific sums in relation to the bills/written notifications of costs (i.e. no round sum transfers) will also remain. Much of the rest of rule 17 will be removed.
- Simplification of the treatment of mixed payments (rule 18): a requirement to allocate funds promptly from mixed payments into the correct business account. Therefore no requirement to pay initially into client account and no 14 day timescale. (Promptly is not defined)
- Removal of rule 19 (payments from the Legal Aid Agency): receipts from the LAA are always receipts for costs (fees and disbursements) and under the proposed new definition of client money receipts in advance of costs and disbursements will no longer be regarded as client money. As a consequence the detailed requirements of rule 19 will no longer be relevant.
- Simplification of rule 20 (withdrawals from client account): a requirement that client money may only be withdrawn from client account:
- For the purpose for which it is being held; or
- Following receipt of instruction from the client; or
- On the SRA’s prior written authorisation;
and the requirement that payments can only be made if there are sufficient funds available for that client. Much of the rest of rule 20 will be removed.
- Simplification of rule 21(authorisation of client account payments): all client payments must be appropriately authorised and supervised. Much of the rest of rule 21 will be removed.
- Simplification of the interest provisions (rules 22 and 23): the requirement to pay a fair sum of interest on client money held by a firm will remain (alternative arrangements by written agreement with the client). The requirement to have a written policy on the payment of interest to be included as part of the Code of Conduct.
- Removal of the Guidelines for Accounting Procedures and Systems: to be replaced by an online toolkit which will comprise of guidance and case studies to aid compliance.
- Removal of rule 27 (restrictions on transfers between clients)
- Simplification of rule 29 (accounting records): the requirement to maintain accurate (as opposed to proper) accounting records (rules 29.1 to 29.4) will remain, in a simplified format. The requirement to obtain bank statements and carry out three way reconciliations every 5 weeks (rules 29.11 and 29.12) will remain. The requirement to keep central records of bills and written notifications of costs (rule 29.15) will remain. The requirement to retain accounting records for 6 years will remain. Much of the rest of rule 29 will be removed.
Although many of the existing rules will either be removed or simplified, it is unclear at this stage what will be included in the guidance, however the SRA have indicated that the main areas that they are proposing to cover are as follows:
- Acting as a trustee and client money
- What is client money
- Name of client account
- Withdrawals to make payments to Charity
- Who can make withdrawals from client account?
- Residual balances due to a client
- Requirements to pay interest
- Accounting records and systems
- Accountant’s Reports
- Record keeping around operation of joint accounts
- Operation of a client’s own account
- Treatment of legal aid money/monies received relating to formal appointments (insolvency)
- Use of Third Party Managed Accounts
- Client account as a banking facility
- Waiver provisions
- Out of scope monies in an MDP
Therefore, potentially much of the detail included in the existing rules may now become guidance as part of the on-line toolkit. The toolkit will not form part of the SRA Handbook. How firms use the toolkit will depend every much on their size, the activities they engage in and the needs of their clients.
Third Party Managed Accounts (TPMA)
The SRA are also considering allowing the use of TPMA as an alternative to client accounts. This is where a third party (a payment service provider) holds money on behalf of two or more transacting parties – in this case a third party would hold funds for a law firm or solicitor and their client. As the Accounts Rules apply to client money which is held or received by the solicitor or firm themselves, money held in a TPMA is not subject to the SRA’s existing requirements.
The SRA are suggesting restricting TPMAs to those operated by payment services providers which are FCA regulated under the Payments Services Regulations 2009.
The SRA have recognised that there are some risks in the new approach which need exploring, particularly in terms of how the proposals for a change in definition of client money may impact on the level of consumer protection.
Under the current rules receipts for fees in advance of work done, receipts for unpaid professional disbursements and receipts for other disbursements not yet incurred are treated as client money and are therefore paid into client account with the protection of being ring-fenced from the firm’s own money. Under the proposed changes this will not be the case and therefore there is an added risk to consumers in relation to this money, which will be paid into the firm’s business account and will therefore have less protection on the event of insolvency of the law firm.
The proposals include an impact assessment addressing this issue.
Full details of the consultation are available here: SRA | Looking to the Future: Phase 3 of the Accounts Rules Review | Solicitors Regulation Authority
If you would like specialist advice on the above, based on your firm’s specific circumstances, please send us an enquiry.