Changes to the definition of client money

The SRA's proposals could reduce the administrative and financial burden of maintaining a client account and obtaining an accountant's report, writes Max Masters

The Solicitors Regulation Authority (SRA) recently published a consultation detailing a number of far-reaching changes to the current Accounts Rules. One of the most interesting changes proposed by the consultation
is to the definition of client money and client liability, which could have a significant impact on a number of firms.

The proposal is to allow 'all fees and disbursements for which the solicitor is liable to
be treated as the firm's money'. The potential benefit for some firms is twofold, both cutting the administrative and financial burden of maintaining a separate ring-fenced client account and negating the need to obtain an accountant's report.

Fees paid on account

One of the key changes covered by the consultation will be the change to the treatment of funds paid on account of fees. Under the current client money rules,
it is required that these funds should be paid into the office account until a bill is raised,
at which point the firm has
to transfer them to the office account within 14 days.

In my experience, this is an area where many firms are in breach of the current rules, resulting in a qualified report in some instances. This will no longer be an issue under the proposed changes, as any funds paid on account of fees will no longer be regarded as client money and consequently can be paid directly into the firm's office account.

It could be considered that the client's funds are at greater risk as a result of this, as monies paid in advance for work yet to be performed will not be protected in a client account in the event of a firm becoming insolvent. There are remedies to this but it is likely to become a more difficult and lengthy process for clients to recover their funds, so it remains important for these fees paid on account to be appropriately detailed on individual ledgers
to be easily attributable.

In the consultation paper,
the SRA explains that money
for which the client is personally liable, such as stamp duty land tax, will continue to be defined as client money. This is because these liabilities are potentially of a very high value and therefore present a significant risk to
the client if the funds are not appropriately dealt with. This is demonstrated by the fact that compensation totalling £3m has been paid out covering these types of disbursements over the past two years alone.Accordingly, the proposed changes to the definition of client money will have less of
an impact on firms that solely deal with conveyancing and probate matters, where funds will continue to be required to be held in a client account on behalf of the estate.

Benefits for firms

The redefinition of client money means it is likely that some firms which specialise in personal injury, medical negligence,
or any other type of general litigation could avoid the burden of obtaining an accountant's report under the new proposal.

Professional disbursements that will no longer be defined as client money include experts'
fees and counsel's fees, which the firm itself is considered to be liable for.

There remains a risk that these fees may not be paid promptly by the firm for cashflow reasons, but this risk is deemed to be covered by the overreaching code of conduct to act in
the client's best interest and ensure that money and assets entrusted to the firm are properly safeguarded.

A further benefit for firms
that may no longer be deemed to hold client monies is that internal costs have the potential to be reduced, as it may
no longer be necessary to maintain bespoke systems
for client money, and the bookkeeping will become
a more straightforward and streamlined process.

At present, approximately 6,000 firms are required to obtain an accountant's report: this costs small firms several hundreds of pounds to obtain, while the fee for a larger firm can stretch to several thousands. Naturally, most firms will be keen to avoid these costs if possible.

It will make interesting reading once the consultation period ends, as the changes proposed could mean that a number of firms will be able to avoid this financial burden, as well as reducing the administrative load of maintaining a separate client account and its associated costs.

Max Masters is an accountant at Kreston Reeves @KrestonReeves www.krestonreeves.com