The changing role of the COFA
The increased focus on self-regulation and more flexible approach to client money proposed by the SRA will make the COFA's duties more of a priority, explains Max Masters
The proposed changes to the Accounts Rules which were outlined in the third phase of the Solicitors Regulation Authority’s review, as published in June 2016, aim to decrease the regulatory burden on legal professionals. The details of this consultation have previously been discussed in some detail.
It is, however, important to emphasise one of the more practical implications arising from the consultation: the changing role of the compliance officer for finance and administration. It is a role that will need to be taken increasingly seriously when considering the impending simplification of the rules and the increasing emphasis on self-regulation.
In our experience, the role of the COFA can be somewhat of an afterthought, particularly for sole practitioners and small partnerships, where the primary drive is generating fee income. For these small practices, it remains questionable whether fee earners will divert more of their time towards the role of the COFA, particularly as we are in a time of economic uncertainty.
For larger practices, where it is possible to employ somebody who is able to dedicate sufficient time to the role, it will be imperative for the COFA to stay up to date with the prospective changes in order to initiate appropriate internal controls and training.
Record of instances
One of the integral parts of a COFA’s role, which will increase in significance with the impending changes, is the maintenance of a record of instances of non-compliance with the Accounts Rules. This is a schedule detailing any instances of non-compliance in respect of client money, and assessing the risks to client money and whether the breach needs to be reported to the SRA.
The reasoning for determining whether the breach should be reported to the SRA should be detailed on the schedule, and this may become more ambiguous with the prospective changes as the rules will not be as ‘prescriptive and restrictive’. There will be more of an emphasis on the actual risk of client money being lost, and COFAs will be allowed to take a more logical approach. It would be worthwhile liaising with your reporting accountant or the SRA directly to help you arrive at the appropriate decision.
The COFA register should, for best practice, be reviewed periodically to determine the recurring breaches encountered by the firm and assess what remedial steps need to be put in place to avoid these breaches going forward. For instance, if there are numerous instances identified of a delay in returning funds to the client at the end of a matter, a new system should be implemented where the matter balance listing is reviewed monthly to identify any residual balances, and ensure that these are dealt with appropriately.
The schedule should also detail explanations of why the breach occurred and whether any further training is required as a result.
COFAs will require ongoing training so that they know the specific rules, types of breach, and which breaches should be considered to be material. It will be interesting reading once the SRA publishes its response to the consultation.
Naturally, as well as being familiar with the rules themselves, the COFA will need to ensure that the accounts department and fee earners are familiar with the rule changes. For instance, one of the most fundamental proposed changes to the Accounts Rules is the change in the definition of client money, whereby payments on account will no longer be regarded as client money, and therefore can be paid directly into the firm’s office account.
Appropriate systems and controls ought to be in place prior to the implementation of the new rules to ensure that any mistakes as a result of the changes are identified promptly, thereby limiting the risk to client money.
The role of the COFA should become more of a priority once the new Accounts Rules have been implemented due to the increased focus on self-regulation and the more flexible and logical approach to client money that is intended. It will be a challenging time for COFAs and accounts departments due to the fundamental changes, so it is imperative that those dealing with client money are prepared and well informed prior to the changes being introduced.
However, it remains to be seen whether the COFAs of smaller practices will be able to dedicate sufficient time to the role to identify breaches in a timely manner and implement the appropriate changes to systems and controls.
Max Masters is an accountant at Kreston Reeves