Reporting requirements: a COFA's guide

The primary duty of both COLP and COFA is to ensure that suitable compliance arrangements are in place for their respective areas of responsibility. Implicit within this is the obligation to monitor to ensure continued compliance and to take appropriate corrective action if breaches come to light.

The responsibility that seems to weigh most heavily on most reporting officers, however, is the duty to record beaches and to report those that are deemed to be ‘material’ to the SRA ‘as soon as reasonably practicable’, as required by rule 8 of the SRA Authorisation Rules.

Posting errors

For the COFA, the problem of evaluating non-compliances that are brought to their attention is all the greater as it is unclear whether the everyday posting errors do amount to a breach of the SRA Accounts Rules at all.

In the absence of any clear guidance,
Bronwen Still and Tracey Calvert suggested in
their Ark Report ‘COLP and COFA: Compliance in Practice’ that the provisions dealing with the obligations of the reporting accountants might assist. In submitting their report to the SRA on
the above, the accountant is entitled to discard ‘trivial’ breaches.

This is further explained at guidance notes (v) and (vi) to rule 44 along the lines of ‘a reporting accountant is not required to report on trivial breaches due to clerical errors or mistakes in book-keeping, provided that they have been rectified on discovery and the accountant is satisfied that no client has suffered any loss as
a result’.

The same guidance goes on to state that precisely what amounts to a trivial breach cannot be completely defined, but it remains a useful concept for the COFA in any event.

Logic would suggest that if there is no need for the accountant to report such incidents to the SRA then why should the COFA? It would certainly be very helpful for the SRA to rule whether a ‘trivial’ breach observed by an accountant equates to a ‘non-material’ breach for the COFA, or perhaps not a breach at all.

For the time being, it would be as well to record such incidents until advised otherwise, not least so that a cumulative picture can be developed. This would also be helpful in clarifying how closely the accountant’s report should reflect the COFA’s records compiled throughout the year.

What, though, of the material breaches that might trouble the COFA? In those firms where Accounts Rules breaches have caused concerns, it is often the areas under the control of the fee earners that seem to trouble the COFA most, as opposed to those administered by the accounts department. Chief amongst these are the controls over client account monies at rule 14.

Time factor

Client money is required by r 14(1) to be paid into a client account ‘without delay’, which is defined in the glossary to the handbook as usually meaning ‘in normal circumstances’ the day of receipt or the next working day.

This definition implies a certain amount of leeway at holiday times and any one delay, as when a cheque for a lesser amount is not taken from an envelope when the letter is opened, would be regarded as non-material. A material breach in these grounds would be likely to require a pattern of failures, however, suggesting more than simple human error and the failure instead of processing systems.

Under r 14.3 it is necessary to return client funds ‘promptly, as soon as there is no longer any proper reason to retain those funds’. This is an important issue for the monitoring that the COFA should be undertaking and is a particular problem in transactional departments such as conveyancing, where a property dealer might request the firm to maintain a large balance pending an auction which he or she is due to attend very shortly.

A firm line must be taken if the follow-up instructions are not forthcoming and the print-outs of those fee earners concerned should be checked regularly to ensure that any such problems are not arising.

Again, any one-off incident is unlikely to amount to a material breach, but failures to observe this requirement on a number of matters - all the more so if different fee earners are involved - could trigger the need for a report to the SRA.

Client money

Closely linked to r 14(3) is the prohibition that ‘you must not provide banking facilities through a client account’ at r 14(5).

Other concerns in rule 14 might arise in relation to r 14.4 and the need to ‘promptly inform a client… in writing of the amount of any client money retained at the end of a matter’. The client must be told the reason for the retention and, if the retention is long term, be advised every 12 months that it is still held and the reason why.

This requirement links closely with r 14.3 and was introduced relatively recently because of concerns by the SRA that firms were not being systematic in dealing with client money when files were closed at the end of a matter.

Continuing the theme of the need to monitor the control of client funds, rules 20 and 21 are other potential reporting areas - and areas of particular risk for disciplinary issues. Rule 20 sets out the circumstances under which client funds might be withdrawn.

Bear in mind also in this regard the provisions of r 17(7) to the effect that costs transferred from a client account must be specific sums relating to a bill or other written notification of costs where sufficient funds are available. Most importantly, ‘round sum withdrawals on account of costs are a breach of the rules’.

It is also likely that the SRA will take a keen interest in how firms deal with client balances which are transferred under the procedure in
r 20.1 (j) and 20 (2). This links closely with r 14.4 and the need to account promptly to clients at the end of a matter, which was intended to reduce the number of client balances held for clients who could no longer be traced.

The maximum that can be transferred under this procedure is £50 and all the steps set out in
r 20.2 must be followed. This means the COFA must have a clear procedure to demonstrate compliance. This is a risk area for the COFA and failure to comply with r 20 (2) could amount to a material breach – especially of sums exceeding £50 were withdrawn without SRA authority.

Pending further guidance from the SRA it seems to be reasonable to suppose that the isolated breach of the Accounts Rules might amount to a recordable breach at most but not, in itself, a material breach.

For the COFA to be reporting a material breach to the SRA a pattern will usually have to have been detected, other than where fraud is involved. In such cases, the COFA is likely to be acting more under his or her duty to report ‘serious misconduct’ under outcome 10(4) of the Code of Conduct rather than, or in conjunction with, any particular failing of the Accounts Rules.

For the meantime, we have to continue to hope that clearer guidance might be provided on what sort of isolated incident could trigger the need for an immediate report. SJ

Matthew Moore is a director of Infolegal Ltd which provides the Colpline subscription advice service www.infolegal.co.uk