Avoiding residual balances

Long the bane of the solicitor’s life is the ?50p still sitting on client account after the conclusion ?of a matter. While most people in the world would simply respond, ‘Oh, it’s only 50p’, come the year-end client money examination, many ?a solicitor will have had the point raised by their eagle-?eyed accountant: ‘There ?is still 50p on the ledger – ?you’ll need to deal with it.’ 

Although some may feel ?we’re being pedantic, this is exactly what we’re required to do by the Solicitors Regulation Authority (SRA) Accounts Rules.

The relevant rule governing residual balances is 14.3: ‘Client money must be returned to the client… promptly as soon as there is no longer any proper reason to retain those funds.’ Since this rule came into force on 14 July 2008, solicitors have been obliged to ensure their client account is not being bolstered ?by clients’ funds that should ?have long since been returned. ?If funds could not be returned to the client, they were to be paid to a charity rather than retained.

A year ago, the guidance ?in rule 20.2, which sets a threshold above which solicitors have to approach the SRA for approval to pay the funds to charity, was updated. Solicitors now do not have to contact ?the SRA for approval until the individual balance exceeds £500, instead of £50. But this drop in admin only relates to the need to contact the SRA. ?The other provision stipulating the need to first make adequate attempts to return the funds still remains in force.

Wasted resources

Obviously, for the 50p example, ?it would be excessive to engage ?a tracing agent to return the funds. But where amounts are notably larger, including under the £500 threshold, some ?steps would still be required? to locate the individual, ?which may well incur a cost. Interestingly, the SRA ethics guidance on such out-of-pocket expenses states: ‘Solicitors ?have no legal authority to ?take out-of-pocket expenses.’ 

It then goes on to say you can agree with the traced individual that you are reimbursed for the costs, but they could of course refuse. And you are specifically prohibited from charging for your time for trying to find them. So, all in all, failing to stop residual balances occurring in the first place wastes your time and money.

With this in mind, what can ?you do to stop them arising? Below are a few tips on what ?you can do to notice them ?before your accountant does:

• Check your ledger when communicating with the client for the last time. ?This requires almost no ?time to do and nips the problem in the bud at source. For a conveyancing transaction, this may be when you are informing them that registration has been completed. You’ll ?be able to see if the Land Registry took a smaller fee than you were anticipating, leaving you with some money that needs to ?go back to the client;

• For a probate matter, sending out the final estate accounts is an ideal time to check that a small dividend cheque hasn’t been received and banked within the last few days;

• Check the effect of cancelled cheques. Often a member of your accounts staff will take responsibility for cancelling long-outstanding cheques back to the ledger. Make sure that your staff notify you of any instances where the matter has been completed, so that the balances aren’t sitting there unbeknownst to you. If your accounts system stops postings to a ledger after a matter has been archived, make sure you’re prompt in closing the matter to stop accounts staff unwittingly creating a residual balance;

• Check your documentation. ?A common cause of residual balances on conveyancing matters is errors on completion statements, where disbursements are incorrectly listed. Make sure that particular attention is paid to ensure no stray disbursements have found their way onto the document;

• Review your matter balance list. This can be quite time consuming, depending on the quantity of clients, but having a look through the list may help highlight balances where you know the matter has come to an end. Some systems are useful and show the date of the last activity. Seeing old dates next to balances could be an indicator that you’ve ?been holding onto the ?funds for too long; and

• Obtain clients’ bank ?details. Residual balances persist when you don’t know where the individual lives or they stubbornly don’t bank their cheque. ?By requesting their bank details at the outset of the engagement, you can make these two issues redundant. Depending on your bank, the BACS charge may even be less than the postage ?to send a cheque.

 

Simon Sheppard is an accounts and outsourcing chartered accountant at Kreston Reeves@KrestonReeveswww.krestonreeves.com