If you are a law firm you will no doubt be very familiar with the current rules set out by the Solicitors Regulatory Authority (SRA) around how to handle client money.
If you are a law firm you will no doubt be very familiar with the current rules set out by the Solicitors Regulatory Authority (SRA) around how to handle client money. In this newsletter we discuss common mistakes under the current rules and the proposed new rules to apply from April 2019.
Current Rules and common mistakes
Residual balances left on a client account at the end of a matter must be returned promptly. The firm must take reasonable steps to identify the owner and repay them, and record these attempts for 6 years.
If the firm is unable to return the balance and it is under £500, it can be paid to charity. If it exceeds £500 then the firm needs SRA approval.
Firms are not allowed to provide banking facilities for their clients (Rule 14.5). A common mistake is firms assume that as long as they are transacting for a client and that they have had a specific instruction then it is fine to carry out a transaction.
The rules specifically say that if a transaction is not related with the service of an underlying transaction (and the funds therefrom) or in relation to a service performed as part of your normal regulated activities, then it should not be undertaken.
Client Account Reconciliations
At least every 5 weeks, the bank statements for all accounts should be reconciled to a list of balances shown on the client ledger accounts. This also requires a review by the Compliance Office for Financial Administration (COFA)/manager. This is covered by Rule 29.
A common problem is performing a reconciliation and not including all of the accounts. The only accounts you can specifically exclude are where firm is acting as a liquidator, a trustee in a bankruptcy, as a court protection deputy, or as a trustee of an occupational pension scheme.
Client monies held in a joint account are also excluded as are accounts in the name of the client that you operate as signatory.
Other common problems include netting off debit balances, and preparing reconciliations for individual accounts without doing this as one global reconciliation for all balances.
Reporting Accountant Rules
Currently all firms holding client money need an annual report from a reporting accountant unless they are considered ‘low risk’. However even low risk firms still need to comply with all the rules. A firm is low risk if it is only holding Legal Aid Agency monies or holds no more than £10k on average and maximum of £250k.
Only qualified reports should be sent to the SRA and there is no need to tell the SRA if the firm falls out of the criteria to need one.
Note it’s the law firm’s responsibility to file the report with the SRA, although in reality the accountant may do this for them.
Reports should be filed within six months where required to be submitted.
The SRA has released new rules which are principle based rather than prescriptive, and will have a likely implementation date of April 2019, although this is not set in stone yet.
The rules themselves are shorter (only rules 13 vs 52) and there are a number of key changes:
Third Party Managed Accounts (TPMA)
The rules allow the use of a TPMA without prior SRA approval. Firms can use a TPMA only if it will not result in the firm holding client money at any point, as long as the client is informed about it, and that you obtain regular statements to ensure accuracy. Currently TPMAs are not regulated by either the FCA or SRA so there is a question mark around oversight in that area.
Reports to the SRA
Under the new rules no report needed to the SRA if a firm ceases to hold client money. As with the current rules, only qualified reports are required to be sent.
There is a new rule (2.2) that if the only client money held for the client relates to fees and unpaid disbursements, it can be treated as non-client money as essentially belongs to the firm. This will result in more money available in the office account, and less in client accounts.
Fees in advance
Under the old rules cast iron fees received in advance can go straight to the office account. This was only allowed if the firm would definitely keep them regardless of the outcome of the matter. They are uncommon as most fees are generally refundable if the client pulls out. Under the new rules however this is completely gone, so these would need to be treated as client money.
What’s stayed the same?
The same requirements exist in many areas including the requirement to bank money promptly, that a firm cannot provide banking facilities, and that reconciliations need to happen at least every 5 weeks.
The new rules are on the SRA website and this is only intended to be a high level summary.
Shipleys LLP acts for a number of law firms so please get in touch if we can assist you.
Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above. If you would like advice or further information, please speak to your usual Shipleys contact.