Eight Months & Counting to the Implementation of the New SRA Accounts Rules!
25th November 2019. That’s the date given by the SRA for them to be implementing the new regulations which include the new SRA Accounts Rules. The book has been whittled down from 44 pages to just over 6!
They will be supplemented by a toolkit rather than guidance notes. The SRA has been consulting over these new rules since June 2016 and they were finally approved by the LSB on 5th November 2018.
The SRA believed that there were too many complex rules which served no justifiable purpose, and therefore they have been removed.
The focus of the rules is ensuring that client money is safe and accounted for properly, with a large emphasis on avoiding residual client balances. The other crucial aspect is ensuring that the client is told exactly what their money is being used for and that it is then only used for its intended purpose.
Transparency on use of funds and solid communication with the client are at the forefront of the new ruleset. This is likely to require the COFA to get more involved with the communicative processes in the firm to ensure that the rules are being adhered to.
The word “promptly” also appears in the new rules. It replaces the specific time frames firms had previously for making payments and transferring funds. Where previously we had two days to pay a private disbursement and fourteen days to pay a legally aided one, we now have the word “promptly”. The same goes for mixed funds received into office account. The client element must be moved to client account “promptly”. The question is; “what is deemed as prompt?”. Whilst this appears to be open to interpretation on the face of it, it’s always better to err on the side of caution. It is highly unlikely that the SRA would seek to increase the time it takes to act upon these items, especially with the increase in use of internet banking where payments can be made immediately or in three working days. The probability is in the favour of a decrease in time to make payments and transfers after receipt of funds as there is no reason not to pay almost immediately. It would be very easy for firms to fall into a trap based on a misinterpretation of the word “promptly”.
Another key change is the introduction of Third Party Managed Accounts (TPMA’s). These accounts are used to administer client money and assist with ID checking at both ends to ensure that the funds are received and sent securely, lessening the risk of cybercrime. Although the firm itself does not hold the client’s money, it is responsible for the administration of the TPMA. Solid systems and processes will need to be implemented to ensure that it is administered correctly.
There is no longer a requirement for a written policy on interest. The SRA does state however that a firm must “account to clients or third parties for a fair sum of interest on any client money held by you on their behalf.” This is quite a difficult one, because who deems what is fair? Can the client come back at the firm and deem that what they received in interest was unfair? It should be considered whether the firm should be cautious and have a rigid policy for interest anyway, regardless of the lack of requirement.
A crucial rule that must be carefully considered is Rule 6.1 Duty to correct breaches upon discovery
“You correct any breaches of these rules promptly upon discovery. Any money improperly withheld or withdrawn from a client account must be immediately paid into the account or replaced as appropriate.”
Although this rule may seem obvious, the SRA are acknowledging here that mistakes do happen. We again see the word “promptly” being used, but when it comes to the replacement of client money, we can also see the word “immediately”.
This aligns itself to the theme that we have seen recently about materiality and qualifying breaches. The occasional error here and there is unlikely to qualify your accountants report and have the SRA knocking on your door. On the other hand, if you do have systematic failures within the accounting procedures then that becomes a qualification. The key to avoiding breaches it to ensure that your systems and processes are fit for purpose and work correctly for the firm whilst keeping it compliant.
Luckily the new rule-set has an entire section stating that client accounting systems and controls are maintained in rule 8. It’s recommended that the firm’s processes link directly to the requirements in rule 8. In doing so, they should be solid enough to keep a firm from falling foul of the rules causing a qualification. Only through ongoing reviews of the accounts processes can a firm ensure that they are compliant.
The final word on this is to be cautious. Despite the rule-set reducing from a forty-four-page book to a six-and-a-half-page pamphlet, vigilance must be maintained. Have your systems and processes for the accounts department documented. Determine as a firm what “promptly” means and stick to your own policy. Ensure you have an agreement within the firm as to how it accounts for interest as well as a transparency and communications policy to ensure that the clients know what their money is being used for at all times.
If the firm’s policies are compliant with the new rules (erring on the side of caution when necessary) and the policies are followed, then a qualified accountants report is a lot less likely!
Alex Simons
Outsourced Accounts & New Business Manager
The Law Factory LLP
