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Article:

The Solicitors Regulatory Authority (SRA) Accounts Rule changes

17 October 2018

The Solicitors Regulatory Authority (SRA), have been working through a three-phase process, which started in October 2014, to simplify the Accounts Rules.  Phase 3 of the overhaul resulted in the redesigning of the Accounts Rules, condensing the rules down into a more understandable, principles-based format that is less “restrictive and prescriptive”. A draft set of new Accounts Rules (only 7 pages long) was published in June 2017, and was subsequently approved by the SRA in June 2018. Despite indications that an implementation date and further guidance would be issued in Autumn 2018, this has yet to be released.  However, it is worth firms bearing in mind the key changes now that will need to be factored into their accounting systems and procedures once an implementation date is announced.

Definition of client money and bills raised in advance of work performed

The revised definition in Rule 2.1 includes money held in respect of fees and/or unpaid disbursements if held or received prior to delivery of a bill for the same.  In very limited circumstances, where firms do not provide regulated services, they could choose not to operate a client account. 

Definition of ‘costs’ and ‘fees’

Prior to transferring costs from the client to office account, there is an obligation in the new rules to send the client a bill or other notification of ‘costs’ as opposed to ‘fees’ (as stated in the old rules). The important difference in the definition of these is that the former includes disbursements. This implies that a firm will have to issue a bill to a client, before transferring money out of the client account, for disbursements paid out of office monies on behalf of the client - albeit further guidance may be issued around this area.

Treatment of Legal Aid Agency (‘LAA’) monies  

Monies from the LAA can still be paid into the office account. However, the new rules remove the obligation to either pay any unpaid disbursements, or transfer the funds from the office to client account within 14 days. The same applies to the old 28 day requirement related to the cessation of the underlying LAA matter. However, it is recommended that firms should still seek to settle the unpaid disbursements by applying an internally agreed time limit.  Non-settlement of these invoices could lead to a delay in the case being closed and a subsequent breach of the SRA’s code of conduct.

Receipt of client money

The new rule 2.3 states that client money should be paid ‘promptly’ into a client account, but does not provide a quantum to the word ‘promptly’. This replaces the phrase ‘without delay’ in the old rules which was defined as same day or next working day. This provides greater flexibility but firms need to be careful to avoid any inadvertent breaches of the regulations by having client money residing within an office account for unnecessary periods of time. The same applies to mixed payments, with new Rule 4.2 stating that the allocation should be dealt with promptly. We expect the SRA to issue further guidance but best practice would suggest that a time-based rule is implemented internally under similar parameters to the existing rules.

The 14 day rule for earmarked funds

The 14 day rule, to cover the extraction of funds from a client account to cover earmarked funds for costs, has been removed.  It could be considered that for best practice, a 14-day policy (or even shorter) should be kept in place under internal guidelines, thus preventing office money from languishing in client accounts for longer than necessary. 

Donations to charity of residual balances

The previous rules allowed donations under £500 for residual balances to be made, subject to certain conditions being followed including having written evidence of attempting to locate the client.  The new rules do not have any such De Minimis limits.  It is expected that further guidance and clarifications will come about since the current rules allow withdrawals from client accounts only on the grounds that a) a client gives permission to do so, b) it is removed for the purpose originally intended; or c) that the SRA give approval for the balance to be removed. This appears to imply therefore that all donations to charity will need to be approved by the SRA.  It is recommended that firms continue to operate robust controls for promptly identifying completed matters and returning the balances on those back to clients to minimise the occurrence of residual balances in the first place.

Third Party Managed Accounts (TPMAs)

The use of TPMAs is a new allowance within the rules and can be useful for the purposes of enforcing greater segregation and independence around the payments and receipts process for the handling of client funds, particularly in the case of a small accounts team. However, there are strict requirements in rule 11 that need to be met for their use to be valid.

Next steps

As mentioned above, we expect there to be further guidance issued and consultation before the final version of the Accounts Rules approved and an implementation date released.  We eagerly await further announcements by the SRA!