The SRA has recently released its final draft of the SRA Accounts Rules 2018 ready for the SRA Handbook 2019 which is due to be released in April.

By the SRA’s own admission, the Accounts Rules were too complicated, but does this really mean that the simplified seven pages will mean things are less complicated for law-firms.

Link to the final draft: https://www.sra.org.uk/documents/SRA/consultations/accounts-rules-annex1-draft-accounts-rules.pdf

The key to unlocking practise procedures to implement, in order to comply with the rules is understanding what client money is.

Client money is money held by you (the company):

• Money on-account of a service provided by you.
• On behalf of a third party in relation to the service provided by you for distribution later as agreed by your client.
• As a trustee. i.e. you have been appointed power of attorney or are a court of protection deputy.
• Money on-account of costs and disbursements if held or received prior to a delivery of a bill of the same.

There is a clarification to the above point however, in that if the only client money you receive is for costs and disbursements and you notify your client by way of a bill what the funds are going to be earmarked for, you do not have to place them in a client account. This means that you can now have “mixed funds” paid into office account directly, providing you inform your client exactly what they are for and where they will be placed. The disbursements in relation to the “mixed funds” received are therefore the firm’s liability to pay.

What this rule does not state is how long a firm has before paying the disbursements held. Previously it was 48 hours for private cases and 14 days for legally aided cases. This rule therefore insinuates that even though a disbursement has not yet been paid, as long as the invoice has been sent to the client, the balance is office money.

To cover the above scenario, and all other “simplified” scenarios the SRA has stipulated the following in their introduction:

Firms will need to have systems and controls in place to ensure compliance with these rules and the nature of those systems must be appropriate to the nature and volumes of client transactions dealt with and the amount of client money held or received.

In short, despite the fact that there is no specific instruction to pay billed yet un-paid disbursements within a certain timeframe, the firm still should. The anticipation is that most firms will stick to the original 48 hours for private cases and 14 days for legally aided ones.

The new rule 4; “Client money must be kept separate” covers the original Rule 17: Receipt and Transfer of Costs.

One of the clear omissions in the new rules is that of the 14-day rule for client monies earmarked for costs. What it does however state is: “You ensure that you allocate promptly any funds from mixed payments you receive to the correct client account or business account.”
The question over this is what is deemed as “prompt”? The only way to ensure that the transfers are handled “promptly” is to revert back to the introduction again where it states; “firms will need to have systems and controls in place to ensure compliance”.

Whilst solicitors may be relieved at the fact that they will no longer have minor breaches for the 14-day rule showing on their accountant’s report, it does not mean that there will be no breaches at all. If it is deemed that funds were not transferred over promptly or if the firm does not have a policy for transferring funds earmarked for costs promptly, they will likely be found to be departing from the rules.

Possibly the largest rule of old, rule 20, “withdrawals from a client account” has been condensed from 9 sub-headers plus guidance notes to 3 sub-headers.

5.1 You only withdraw client money from a client account:

(a) for the purpose for which it is being held; or

(b) following receipt of instructions from the client, or the third party for whom the money is held; or

(c) on the SRA’s prior written authorisation or in prescribed circumstances.

5.2 You appropriately authorise and supervise all withdrawals made from a client account.

5.3 You only withdraw client money from a client account if sufficient funds are held on behalf of that specific client or third party to make the payment.

The SRA here is encouraging the firm to always ensure that the client knows exactly what the funds are being used for at any given time, before withdrawal. This then condenses rules 20.1 (a-i) into the new rule 5.1 (a). Further to that, the SRA in rule 5.3 is stating that you must not overdraw the client ledger at any given time.

One area which upon first look appears to have been omitted altogether is the residual client balances issue. Rule 20.2 originally stated that if there is a residual client balance, i.e. money not covered by the withdrawal rules of 20.1 then certain procedures would need to be followed. The firm would have to establish the owner of the funds, make adequate attempts to return them and record those steps. If then the money cannot be returned, the firm must either pay to a charity (if under £500) or apply to the SRA for permission to pay to a charity of over £500.

In this scenario we must combine two of the new rules:

2.5 “you ensure client money is returned promptly to the client.”
5.1 (c) “You only withdraw client money from a client account on the SRA’s prior written authorisation or in prescribed circumstances”

Both-of-these rules cover residual balances in full. However further detail as to whether the £500.00 & charity rules of 20.2 still being valid is yet to be confirmed. The advice would be to contact the SRA directly in this instance. Crucially, the firm must have a system in place to ensure client money is returned promptly so that residual balances no longer occur.

One of the most significant changes of the rules is the introduction of Third Party Managed Accounts (TPMA’s).

A TPMA is an account held by a specific provider as an alternative to a client account. This account is agreed with and operated by the client and the firm. Critically, and as stated in the SRA guidance on TPMA’s: “Money held in a TPMA does not fall under the definition of client money in our Accounts Rules as it is not held or received by you. As such it does not have to be held in accordance with those rules.”

The rule is:

Rule 11: Third party managed accounts

11.1 You may enter into arrangements with a client to use a third party managed account for the purpose of receiving payments from or on behalf of, or making payments to or on behalf of, the client in respect of regulated services delivered by you to the client, only if:

(a) use of the account does not result in you receiving or holding the client’s money; and

(b) you take reasonable steps to ensure, before accepting instructions, that the client is informed of and understands:

(i) the terms of the contractual arrangements relating to the use of the third party managed account, and in particular how any fees for use of the third party managed account will be paid and who will bear them; and

(ii) the client’s right to terminate the agreement and dispute payment requests made by you.

11.2 You obtain regular statements from the provider of the third party managed account and ensure that these accurately reflect all transactions on the account.

The most important element to understand here is that the account is administered by the firm and any mis-administration can be disputed by the client. Therefore, even though the funds within a TPMA do not fall under the SRA Accounts Rules as client money, the solicitor can still be held accountable and their conduct over the administration of the TPMA can be questioned.

It will be essential for firms to have a strict policy behind the use of TPMA’s backed up by solid systems and processes for their administration.

Very careful reading and consideration of the new rulebook is essential. Just because it does not specifically say something, does not mean that the principles will not be applied. Therefore, policy over the implementation of the rules is required to ensure that all areas are covered. Many will implement systems and processes based on the previous rulebook primarily as a catch-all. Accounts departments must pay extra attention to certain words like “promptly” and ensure they understand what client money is so that they do not fall foul of the new book.

It may only be seven pages, but the scrutiny of conduct and accounts processed will be just as rigorous.

 

Alex Simons
Outsourced Accounts & New Business Manager
The Law Factory LLP