SRA Accounts Rules Phase 3 Consultation – From a cashier’s perspective
Phase three of the review of the SRA Accounts Rules is now in consultation. Phase one was October 2014 and phase two, November 2015. October 2014 was the time where we first saw Outcomes Focused Regulation. This new style of regulation was seen as a rather radical change to how cashiers governed the accounts during an accounting year.
Some of the main changes were the introduction of the Compliance Officer for Legal Practice (COLP) and Compliance Officer for Finance and Administration (COFA). These two brand new roles had to be considered carefully and drafted into the firm’s structure. In addition, firms were given responsibility for their own fair policy to deal with interest payable to clients.
A significant shift came in the area of breaches and what they entail. Beforehand it was clear what was deemed a material breach of the rules. Now it is much more self regulated. The COLP and the COFA must determine whether a material breach has occurred and determine whether to self-report. Outcomes Focused Regulation concentrates heavily on recurring breaches made by a firm. Registers must be kept of breaches on an ongoing basis so that it can be determined whether a system or process within a firm is failing, so the problem can be addressed and rectified. This is a key area when dealing with monthly accounts and we believe it is the cashier’s job to notify the COFA of systematic failing and to work with them to change the approach to prevent further breaches.
The rules governing potential breaches of the SRA Accounts Rules have not changed for many years and the SRA state in the consultation that “The third phase has looked more widely at the existing Accounts Rules and makes proposals for broader change” The SRA’s aim is to simplify the Accounts Rules.
We will focus on a few of the significant changes for phase three which may alter how the accounts department functions within the practice.
“Change the definition of client money”
The consultation states that funds paid in for all fees and disbursements (mixed funds) can be treated as the firm’s money. Whereas previously, mixed funds were paid directly into client account and then transferred when necessary. Companies can now pay mixed funds directly into office account. The SRA believe that this will lessen the requirement for a client account and therefore reduce compliance costs.
This is a huge step forward for the SRA. However there are potential pitfalls and cashiers must be extra careful when receiving funds directly into office account. Should mixed funds be paid in, all disbursements must either already be paid out or paid out without delay when the funds credit the office account. This will require round the clock cover so that disbursements can be paid out promptly to avoid breaching office credit balances.
“Provide an alternative to the holding of client money”
The SRA are consulting on whether to allow the broader use of Third Party Managed Accounts (TPMA’s) to hold client funds, rather than the solicitors’ practice holding them in their own client account. The objective is to “provide sufficient flexibility for firms to meet their obligation to safeguard client money and assets and alternative options for clients.” There is no clear description of usage of a TMPA in the consultation, only that the SRA is consulting on whether to allow them to be made available to practices.
There are however certain notes and concessions from the SRA on the proposal. They state that there must be appropriate levels of consumer protection but that TPMA’s are currently “relatively untested”. The SRA also notes that a TPMA may only be appropriate to use with certain work types. The SRA will include this in their paper “Alternative to Handling Client Money” as part of their wider review of the rules.
As cashiers, we need to carefully consider TPMA’s and their usage. Holding any funds away from the business has its pitfalls, so being able to monitor these funds and more importantly account for them is imperative. The SRA have stated quite clearly in their consultation that “money held in a TMPA is not subject to our existing requirements.” As cashiers it is our responsibility to discuss with the COFA and management team of the firm, the regulations and processes needed to self-regulate the use of TPMA’s so that the practice can safeguard its’ client funds. It is also crucial that the TPMA provider is researched thoroughly to make sure we have confidence in the organisation where the monies are held.
“Published Interest Policy”
In the initial phases of the SRA Accounts Rules changes, a client interest policy was required to be drawn by the firm. The policy had to be fair to the client and had to be very clear in the company’s documentation. Upon implementation, we noticed that most companies kept to the £20 rule, where if interest reached £20, it would then be paid to the client. In phase two, it was clear that the SRA wanted companies to revisit their interest policies particularly and this is even more important now as the Bank of England interest rate has reduced to 0.25%. However, the SRA are now asking whether the requirement for the interest policy should still be published.
We have come across many Small to Medium Enterprises (SME’s) which have an interest policy as stated above. Since the financial crash where interest rates dropped dramatically, the payment of interest to clients has been very minimal. Very few client ledgers where funds are held reach the £20.00 interest level so the policy becomes obsolete. We have however noticed that some firms working mostly on administration of estate cases open designated client deposit accounts. This ensures that all interest is calculated and paid into that account by the bank and all interest is paid to that client regardless of the amount. We believe that companies should definitely review their interest policies in light of the interest rate reduction but be prepared for the policy to be abolished altogether after the consultation.
“Payments from the Legal Aid Agency (LAA)”
The SRA has acknowledged that “firms would only ever receive money for payment on account of the firm’s costs or disbursements.” The SRA has therefore stated that they “propose to remove the specific Accounts Rules which deal with the treatment of LAA money.” The accounts rules currently state that money for costs and disbursements can be paid directly into office account, providing unpaid disbursements are paid to suppliers within 14 days. Should the firm be unable to pay the disbursement out within 14 days, the funds must be moved to a client account. The SRA consultation in phase three is to remove these requirements. The SRA has however stated that they “expect that the continued obligation to reconcile amounts and keep accurate records will ensure that any monies received and not utilised by the firm will be dealt with appropriately and returned to the LAA promptly where necessary.” The SRA is currently discussing the proposal with the LAA to see if it is viable.
We believe that this is another huge step forward in firms’ self-regulation and aims to lessen the funds travelling through client account. Many companies are legally aided and have to deal with disbursements paid for by the LAA. This lessens the need for a client account, certainly if a company is solely legally aided with minimal holding of client money. The requirement for a client account could potentially be completely un-necessary if they received the majority of their funds from the LAA and chose to pay mixed funds from private work into office account.
The key here from a cashier’s perspective is to make sure that all disbursements are paid out promptly, as there is no client account “safety net” to send the monies to, should their records be inaccurate causing a delay. The systems and processes here would have to be very rigid to accommodate all mixed funds crediting office account, and again round the clock cover would be required to make sure all disbursements were paid out within the appropriate time-frame.
Conclusion
We consider the above aspects some of the most important of the final consultation from the SRA. There is clearly a push for more self-regulation and monitoring. There appears to be much more flexibility in how companies can deal with incoming funds which in time will certainly aid cash-flow. This flexibility will certainly lessen the number of trivial breaches that the average SME may have during an accounting year whilst focusing mainly on recurring breaches which become qualified. A qualified breach therefore will be taken much more seriously than in the past as it will entail a systematic breakdown, rather than a one off occurrence.
The full SRA consultation can be found here: https://www.sra.org.uk/sra/consultations/accounts-rules-review.page
The Law Factory prides itself on being able to recognise immediately any breakdown in the accounting function of a company. We work tirelessly with the firm to put systems and procedures in place to make sure that the SRA Accounts Rules are complied with and that they also work for the company. As cashiers we will work with the COFA and the COLP to make sure that the accounting function runs smoothly and that the company is apprised fully of its financial situation at any given time.
Alex Simons MAAT ILFM
Outsourced Accounts Manager
The Law Factory LLP
17th August 2016
