It is important to interpret these alterations properly to ensure the rules are followed correctly and avoid any departures.

Amendment 1 – Firms taking money for costs in advance of work being done.

It was unclear from the original rule changes in 2019 whether firms could transfer client monies to office account for costs yet to be incurred. Essentially there was ambiguity over whether the work had to be done first before the funds were taken.

The proposed wording has been altered to this:

Part 2: Client money and client accountsx

Client money

2.1 Client money is money held or received by you: 

(a) relating to regulated services delivered by you to a client;

(b) on behalf of a third party in relation to regulated services delivered by you (such as money held as agent, stakeholder or held to the sender’s order);

(c) as a trustee or as the holder of a specified office or appointment, such as done of a power of attorney, Court of Protection deputy or trustee of an occupational pension scheme;

(d) in respect of your fees and any unpaid disbursements if held or received prior to the delivery of a bill, for the same or other written notification, of the costs once these have been incurred.

The above means that funds received into client account are deemed client money and are protected until the costs are incurred and a bill has been delivered. The firm must do the work before transferring the funds. The client at any time before the work has finished is within their rights to have their money returned to them when the work is incomplete. After the costs are “incurred” they can be billed and transferred.

 

Amendment 2 – Reimbursements for money spent on behalf of the client.

There was confusion over whether a bill was required for disbursements before they could be transferred into the office account. The SRA are proposing to alter the wording to try and make it clear that a bill is not required.

4.3 Subject to rule 4.4, where you are holding client money and some or all of that money will be used to pay your costs:

(a) you must give the client or the paying party a bill, of costs, or other written notification, of the costs incurred, to the client or the paying party;

(b) this must be done before you transfer any client money from a client account to make the payment; and

(c) any such payment must be for no more than the specific sum identified in the bill, of costs, or other written notification, of the costs incurred, and covered by the amount held for the particular client or third party.

4.4 Rules 4.3 does not apply where you withdraw client money from a client account in full or partial reimbursement of money spent by you on behalf of the client, or the third party for whom the money is held.

There are a few things to take-away from the above amendments. The first is that the client will need a written notification, i.e. a bill for any profit costs incurred but is not required if the firm is reimbursing itself for disbursements paid or partially paid for on behalf of the client. It is important that this only covers disbursements which have already been paid, not disbursements which have been incurred but are yet unpaid.

Whilst this will help certain firms and their cashflow to a degree, I feel it is important to address the issue of VAT. In my opinion, it is best practice to render a bill for all disbursements before transferring from client to office to cover them. If the firm is registered for standard VAT (a bills delivered basis) then the VAT output for the disbursement is accrued at the time of raising the bill. Most accounting systems will not apply VAT output upon a transfer from client to office alone, meaning the VAT output could be missed for those disbursements. If the firm is operating on a cash VAT basis, although the VAT is not accrued until the funds are received into office account, most systems will need to allocate the disbursements using a bill entry first.

I also feel it is best practice to send clients bills for all costs and disbursements incurred that are being transferred against. It ensures everything is clear and that disbursements and VAT are treated correctly. It also provides an accurate audit trail from the accounts system to the bill book should there ever be a VAT audit.

 

Amendment 3 – Operation of a client’s own account.

The operation of a client’s own account is something that happens when a solicitor is appointed as a deputy (Court of Protection) or attorney (under a power of attorney). It gives the solicitor the legal access to make and receive payments directly from or into their client’s bank account. This is most frequent when the client is vulnerable/unable to self-advocate and does not have the capacity to operate their own bank account and bills still need paying.

The rules implemented in 2019 stated that the accounts would need to be reconciled in accordance with general client reconciliation standards. Meaning every 5 weeks, they had to be reconciled against obtained bank statements. Firms found this difficult for several reasons. The first being that it was often very difficult to obtain bank statements every five weeks, the second was being able to reconcile everything that appeared on those statements because not all entries would be undertaken by the solicitor.

The amendment to the rules:

Operation of a client’s own account

10.1 If, in the course of practice, you operate a client’s own account as signatory, Part 2

of these rules does not apply save for:but you:

(a) rule 8.2 – obtain periodic statements from banks, building societies and other financial institutions for each such account;

(b) rule 8.3 – reconciliations keep a record showing transactions initiated by you which should be checked against the statements from banks, building societies or other financial institutions; and

(c) rule 8.4 – bills and notifications of costs keep readily accessible a central record of all clients’ own accounts that you operate including all bills or other written notifications of costs given by you.

10.2 The record kept under rule 10.1(b) must be signed off by the COFA or a manager of the firm at least every 16 weeks. You should promptly investigate and resolve any differences that have been identified

The SRA have also taken a step further and issued guidance to help keep firms compliant with rule 10:

We understand that not all law firms will keep ledgers for a client’s own account and will not have access to monthly bank statements in order for reconciliations to carried out at least every five weeks. If you are unable to meet these requirements, we will not regard you as being in breach of the SRA Accounts Rules if you take reasonable steps to record – and satisfy yourself – that the client’s money is not at risk and to record the position.

Therefore, we would expect you to keep a:

• central register of the client own accounts that you operate,

• separate record of the transactions carried out by you or on your behalf in respect of the client’s own account, and

• record of your bills and other notification of costs relating to that client’s matter.

This information should be made available to your reporting accountant as and when required. We might also ask for this information.

Providing there is a reconciliation of the clients own account at least every 16 weeks for the transactions undertaken by the firm and the guidance above is followed, then the firm will be compliant with SRA Accounts Rules. They have certainly made things a lot easier and clearer for firms with this amendment. My advice is certainly to keep as much evidence as possible for all transactions undertaken on the account and link it all back to the client file.

 

I think these amendments to the SRA Accounts Rules will be largely welcomed by the legal community. They are certainly clearer and avoid much of the ambiguity from 2019. The SRA are certainly listening to feedback from the legal community. I am hopeful that this level of communication and engagement with the legal community will only strengthen overall compliance and best working practices.

The consultation closed on 08/03/2023 but all details can be found here: SRA | SRA Standards and Regulations: minor amendments | Solicitors Regulation Authority

 

Alex Simons MAAT
Outsourced Accounts & New Business Manager
The Law Factory LLP
16/05/2023