The new SRA Accounts Rules will come into force on 25 November 2019. Rosy Rourke of Armstrong Watson outlines the changes, and what law firms should be doing now to prepare
It has now been confirmed that the changes to the SRA Accounts Rules will come into force on 25 November 2019. The delay in implementation means that firms now have a few more months to plan for the changes. It has still not been confirmed what, if any, transitional arrangements will be put in place, so you need to ensure that you, your practice and systems and processes are ready for the introduction date.
Most law firms may think that continuing to apply the existing principles will be acceptable, but there are certain specific changes that require further consideration in advance. We are still waiting to see what additional guidance will be issued by the Solicitors Regulation Authority (SRA), and the lack of detail in the rules means that any complacency in your planning may result in breaching the rules.
All references are to the new rules unless stated otherwise.
Disbursements and raising fees
There are no longer so many different treatments of types of disbursements.
2.1(d) refers to “unpaid disbursements if held or received prior to delivery of a bill for the same” as client money.
4.3(a) says “you must give a bill of costs, or other written notification” before using client money to pay your costs.
Non-professional disbursements such as search fees, which, under the previous rules, may have been transferred to office account when incurred, are now included within the word “costs” and will now be client money until the bill is raised. In the reverse, if any disbursement has been billed, whether paid or not, it becomes non-client money.
The new rules are much less prescriptive in terms of timescales – the word “promptly” is used in a number of places instead
This change may have cashflow implications, as it is likely that disbursements will be transferred from client account to office account later than under the current rules, unless a decision is made to bill earlier.
In addition, there is no longer the concept of an ‘agreed fee’, so these will remain as client money until the fees are incurred and billed.
Firms should review and consider their policies regarding disbursements and billing arrangements on a department-by-department basis. Consider the following.
- Will you raise a bill for disbursements only?
- Will you raise an “other written notification of costs”? Will this be by letter or email? How will you keep a record of such notifications?
- Will you continue to raise the bill at the same stage as you always have done, thereby delaying the transfer of some disbursements or agreed fees?
All fee-earners should be aware of the policy changes and how matters will be dealt with, to ensure compliance with the rules and that costs and disbursements are transferred correctly and promptly.
The new rules are much less prescriptive in terms of timescales – the word “promptly” is used in a number of places instead, including around client money (2.3 and 2.5), the allocation of any funds from mixed payments (4.2), and the correcting of breaches (6.1).
Compliance officers for finance and administration (COFAs) should consider how they will define “promptly”. It is likely that the definition will be different for each of the above rules. Whatever is decided should be documented and communicated within the firm.
When considering “promptly” in terms of 4.2, a COFA may want a little more wiggle room than at present, and decide to set a policy to transfer costs from client to office within, say, 20 days. This may help with compliance requirements, but for commercial reasons, would that extension be a good idea, or should a lower target be set?
If “promptly” is not appropriately documented in your office manual, it will be difficult for your reporting accountant to check if you are compliant. Whether not having a documented policy becomes a reportable breach will depend on the outcome of any testing undertaken and the frequency of issues discovered.
Central records of bills
Although not an obvious change to the previous rules, 8.4 is extended to include a requirement for any “other written notification of costs” to be kept in a readily ascertainable central record.
You’ll need to consider the implications of this when setting your policies regarding the transfer of disbursements if you decide to notify clients via email and letter, as noted above. Those written notifications will need to be kept centrally with the bills.
Client money on demand
The replacement in the new rules of “instant access” with “on demand” regarding client money presents potential opportunities for firms to use accounts with higher interest rates. Firms should start to explore options with their bank managers.
The new rule also says an alternative arrangement can be agreed in writing with the client. You’ll need to consider this route carefully, as there may be more administration involved in opening a separate account or deposit for a client, and thought should also be given as to why a client would be asking for funds to be placed on deposit to earn a higher interest rate. You will need to ensure you are still holding the client money in connection with your regulated activities, and not simply providing banking facilities for a client. There will, of course, be high value cases where this may be appropriate.
Payment of interest
The new rule 7 is more explicit in detailing that firms can make alternative arrangements with clients regarding the payment of interest.
Although firms will still need to ensure they pay interest when it is fair to do so, firms can, as long as they provide an alternative arrangement in writing, review their interest policy and perhaps consider increasing the de minimis limit for the payment of interest, to reduce future administrative burdens if interest rates are to rise.
At first glance, the new rules appear to be silent on the subject of residual balances, but from our discussions with the SRA, this will be governed by 5.1(c), which concerns withdrawals from a client account “on the SRA’s prior written authorisation or in prescribed circumstances”.
We understand that the rules have been drafted so that the SRA does not need to undertake consultations or obtain external approval for minor changes to the way that matters such as residual balances are dealt with. The SRA will rely on “prescribed circumstances” to allow solicitors to continue self-certifying residual balance donations to charity.
Guidance on this will be published on the SRA website. The content remains to be seen, but we expect it to replicate the current rules, to allow self-certifications under the following circumstances.
- The balance does not exceed £500.
- Reasonable attempts to identify the owner have been made.
- Adequate attempts to return the money have been made.
- The steps taken above have been recorded.
- A central register of the amounts paid to charity has been maintained.
For amounts over £500, SRA approval will be required before making payment to charity.
Many firms have worked hard to reduce and resolve their residual balance issues since the current rules were introduced, and it is important that that good work is not undone just because the rules are less explicit. COFAs should ensure that file closure procedures are reviewed and any changes that the firm intends to implement are documented (including the addition of the “prescribed circumstances” wording).
This also demonstrates how important it will be for firms to be continually aware of new guidance being posted online by the SRA, in order to remain fully compliant.
Third party managed accounts
Rule 11 regarding third party managed accounts (TPMAs) appears to offer an opportunity to firms to outsource the handling of “client money” to a third party. The rule states that when using a TPMA, the firm is not holding or receiving client money.
The fact that the firm does not hold or receive client money would, on the face of it, suggest that there may be a reduction in the firm’s administrative burden, including not necessarily requiring an accountant’s report.
However, 11.2 states that the firm would still need to “obtain regular statements… and ensure that these accurately reflect what has happened”. As it will still be the firm’s responsibility to check the transactions, there may be little reduction in the burden. In fact, it could be more difficult to verify and check the transactions than if the money had been held in a client account and the full rules followed in the first place.
TPMAs may be more suitable for newer / smaller firms, or firms that do not regularly hold client money and therefore do not have a client account. Start-up firms may decide not to have a client account unless absolutely required, as there is now an alternative available.
A further area where TPMAs may be particularly useful may be escrow or joint accounts, which now appear to be becoming more difficult to set up.
Other points to note
The new rules regarding joint accounts and the operation of clients’ own accounts (9 and 10) are not substantially changed from the previous rules. However, there is one change: 10.1(c) notes that these accounts now need to be included in the reconciliations for the firm, which was not previously the case. This may be difficult to achieve, particularly if (quite rightly), the transactions on a client’s own account are not posted to the firm’s client account ledgers. We have asked the SRA for more detail in this area, and we hope this will be included in its guidance.
Rule 8 has been changed: liquidators, trustees in bankruptcy etc are now largely to be treated in the same way as other more normal types of matter. This will be a change for many firms; central records of these matters should be reviewed now and you should plan for how to account for them post-25 November 2019.
Steps to take now
- Review and update your policies and consider any updates required to implement the new rules.
- Consider the impact of those policy updates on your systems and controls and ensure they are able to support the changes.
- Arrange training on the new rules and your new policies for fee-earners, management and finance departments.
- Consult with your reporting accountant if you are unsure of any proposed policy changes.