Law Society policy adviser Anjali Mouelhi answers some of the key questions about the new SRA Accounts Rules
The SRA Accounts Rules 2019 (SAR 2019) were introduced on 25 November 2019 and are significantly shorter than their predecessors. There are approximately 7,000 law firms that hold client money, and this article is intended to answer some of your questions concerning costs and the new rules, and the benefits your firm can gain from implementing appropriate customised systems and controls to operate more flexibly, while still remaining compliant.
Who should be aware of the new Accounts Rules?
The rules apply to authorised bodies, their managers and employees. They additionally provide that the authorised body’s managers are jointly and severally responsible for compliance by the authorised body, its managers and employees with these rules (rules 1.1 and 1.2). This is a wide-ranging obligation and all partners and employees – including fee-earners, compliance staff, finance teams and any support staff who deal with costs – should be fully trained and aware of the requirements.
What policies and procedures should you have?
The new rules provide firms with much greater flexibility to manage their business. Some firms have embraced this by amending their existing systems and controls, away from the old, overly prescriptive rules.
For example, the previous rules required costs to be transferred from client account to office account within 14 days of delivering a bill. However, this can now be varied to suit the firm, depending on what is appropriate and the type of work the firm undertakes. The process could even be different from department to department in a firm – so long as the firm is always acting in the best interests of the client.
If your firm has taken a more cautious approach, I encourage you to review your policies and procedures sooner rather than later, to start benefiting from the flexibility offered by the new rules. It is recommended that firms have their own written, bespoke policies and procedures in place, appropriate for their practice, to enable them to demonstrate compliance with the spirit of the new rules.
How do the new Account Rules define “client money?”
Rule 2.1 defines “client money” as money that is held or received by you on behalf of a client or third party that:
- relates to regulated services, or
- you have received in a specific capacity, for instance as a trustee.
Such monies must be held in your firm’s client account. The definition includes monies paid in advance for fees and disbursements before a bill has been raised.
The SAR 2019 definition of “costs” includes disbursements, so firms are not permitted to transfer funds from client accounts to business accounts to cover paid disbursements, without first delivering a bill to the client.
Does my firm have to hold a client account?
For the first time, the new rules (rule 2.2) provide for an exemption to the need to hold a client account. This is permitted where the only client monies held are for advance fees or disbursements incurred by a firm on behalf of a client and for which the firm is liable. This means that money held for a disbursement, such as counsel’s fees, will not necessarily have to be held in a client account. So long as your firm complies with rules 2.1(d) and 2.2, a client account is not required.
This exemption has considerably simplified the obligations for firms that do not hold other types of client money or have any other reason for maintaining a client account. With these firms, monies can be paid directly into the business account and certain requirements of the SAR 2019 will not apply, such as the necessity to obtain an accountant’s annual report or pay interest to a client.
However, firms will still need to comply with the rules applicable to their business accounts – for instance, reconciling bank statements every five weeks and keeping a central record of all bills. Furthermore, their compliance officers for financial affairs are obliged to monitor the processes and controls operating under the exemption, and must consider whether it becomes necessary to hold a client account.
To protect the interests of clients, where advance payments for fees and disbursements are held in your firm’s business account, you must inform a client of this at the outset. Clients will still be able to apply to the Solicitors Regulation Authority’s Compensation Fund for those monies, should circumstances dictate that this becomes necessary.
Conversely, if your firm needs to hold other types of client monies, such as stamp duty land tax, this must be kept in a client account. Accordingly, firms undertaking certain types of work will still need to maintain a client account or set up a third-party managed account.
What could constitute a “written notification of costs”?
How you deliver a “written notification of costs” will be up to you, providing that you retain a record of the notification. Therefore, this notification may be delivered by a variety of means such as a bill of costs, letter, email, text message or other form of written notification, depending on what methods of communication have been agreed with the client.