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Rules versus principles

Rules versus principles


There is scope for many different interpretations of the draft rules on client money, which could cause difficulties for COFAs, explains Hannah Davis

Over the past few years, the Solicitors Regulation Authority has been working towards a more streamlined set of rules in respect of client money. This has led to a new focus on “principles” and “professional judgement” as opposed to the rules-based approach which has been adopted for many years.

The results of the consultation have recently been published, and as the draft rules proposed by the SRA have been heavily reduced from 52 to 13, it is very clear that this new approach is to have a significant impact on the way in which reporting accountants carry out examinations.

The more ambiguous nature of a principles-based approach means that it is more important for firms to have a recorded set of strong systems and controls, and that these should be implemented consistently across the firm.

A rules-based approach to the client money examination was black and white, with rules such as 20.1 stating that “client money may only be withdrawn from a client account when it is…” followed by 11 individual, specific occasions when client money is permitted to be withdrawn from the client account. This left no ambiguity for the compliance officer for finance and administration: if money was withdrawn from a client account and it didn’t meet one of the 11 criteria, then it was in breach of the rules.

Similarly, rule 17.1(c) states that when you receive money that is in full or part payment of your firm’s bill you must pay the entire amount into a client account, transferring any office money to the office account within 14 days. As with rule 20.1, this also has no air of ambiguity about it and informs the COFA of exactly what the requirement is in a measurable way so that any breaches of this rule can be identified and dealt with in a timely fashion.

Less red tape

The new draft rules proposed by the SRA include replacements to these rules in the following formats.

Rule 20.1 is being replaced with rule 5.1, which consists of three individual ways in which money can be withdrawn from a client account:

  • For the purpose for which it is being held;

  • Following receipt of instructions from the client or the third party for whom the money is being held; or

  • On the SRA’s prior written authorisation or in prescribed circumstances.

This alleviates any red tape previously imposed by the old rules and instead focuses more on the professional judgement of the COFA and, to some extent, the reporting accountants undertaking the examination.

Rule 17.1(c) is being replaced with rule 4.2, which simply indicates that you should allocate promptly any funds from mixed payments you receive to the correct client account or business account.

This has already caused issues within firms, evidenced by the consultation responses to the question regarding this rule change. “Prompt” is a somewhat vague definition of a length of time and I can foresee COFAs really struggling to implement this rule without a measurable dimension. Therefore, I would envisage many firms continuing to use the 14-day rule as their yardstick.

Challenge for COFAs

On paper, the move to a principles-based method of reporting seems like a much better way to ensure that firms are keeping client money safe. It is a lot more flexible and will enable firms to focus more on their systems and controls rather than having to adhere to a strict and lengthy set of specific rules. It also means that there will be less red tape involved for those clients that are already compliant with the rules.

However, it would seem that COFAs will have a much harder time trying to enforce rules where the guidelines are particularly vague in certain areas. It may be the case that individual firms have to break down the new drafted version of rules and add their own measurable elements to them, in order to have control over whether they deem a breach to have occurred.

There is scope for many different interpretations of the draft rules and it is down to the individual COFAs to make sure that their interpretations are followed by the rest of the firm and that they are documented in detail so that they can be reviewed where appropriate by the SRA or reporting accountant during an examination.

Hannah Davis is a member of Kreston Reeves’professional practices team


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