Keeping clients' money safe
By
Sabrina Pearson considers the potential impact of the SRA's newly revised Accounts Rules on firms and reporting accountants
Last year the Solicitors Regulation Authority published a consultation on the third and final phase of the update to the Accounts Rules, which saw the proposed rules reduce from 52 to just 13. The SRA’s response to this consultation has now been published, alongside a summary of the responses received, an assessment of the impact of the change on consumers and firms, and – of course – the duly revised rules.
The update to the rules is part of the SRA’s modernisation of the regulation of the legal sector; the focus of the new rules is ‘keeping clients’ money safe’. Alongside this, the rules offer more flexibility to firms and place greater trust in firms and their staff by allowing them to exercise professional judgement and decide what is best for their business and their clients. This is evident not only from the significant shortening of the rules but by the removal of prescriptive rules in favour of those which instead require the application of judgement.
Concerns raised
It is interesting that in some instances this change has not been entirely well received. One of the SRA’s consultation questions centred around mixed payments. Under the current rules, if such a payment is paid into the client account, office money must be transferred out within 14 days. Rules like these can result in technical breaches for many firms despite there being no real threat to client money.
The proposed rule, 4.2, is as follows: ‘You ensure that you allocate promptly any funds from mixed payments you receive to the correct client account or business account.’
The use of the term ‘promptly’ was met with disapproval and discomfort by many respondents, who described the change as ‘unnecessary’. Further, opponents to this rule believe that client money will be at greater risk of manipulation by firms. However, the SRA has declined to amend the rule, content that the application of other rules such as acting with honesty and integrity will result in compliance. It is important to note that the majority of respondents did see the change as a positive one, but requested the SRA issue guidance on the definition of ‘prompt’.
Definition of client money
One rule that has been amended in light of the consultation is the definition of client money. The SRA had proposed to allow sums received in advance in respect of fees and disbursements to be treated as the firm’s money. Respondents felt that this change would not be beneficial for firms or their clients. The general view was that this change would have a far-reaching impact on systems and processes and would result in additional costs for firms, and was therefore strongly opposed.
The SRA has now amended the definition of client money to include these sums, until the point at which they are billed to the client. Thus, firms need only change their systems should they wish to.
However, to accommodate those firms which may not wish to operate a client account, there is an exemption available where the only client money a firm holds is advance payments for fees and advance payments for disbursements for which the firm is liable (such as expert fees and counsel’s fees). These firms will not be required to operate a client account so long as clients are made aware in advance of where and how the money will be held. These firms may benefit from potential cost savings in areas such as professional indemnity insurance and compliance, as no accountant’s report will be required.
Reporting accountants
The new rules have been well received overall, although they will not come into effect until autumn 2018 at the earliest. This will give firms and other stakeholders, such as reporting accountants, the opportunity to consider the potential impact of the changes before they are implemented.
It might well be the case that many firms see little or no impact; in fact the SRA expects that many will continue to operate as they do under the current rules, which will result in compliance with the new rules. For the reporting accountants, however, the new rules will undoubtedly prove challenging as we continue to steer our focus from technical breaches to professional judgement, in order to play our part in ensuring the firms we work with are keeping clients’ money safe.
Sabrina Pearson is a member of Kreston Reeves’professional practices team