New SRA Accounts Rules: Before-And-After Moment Ahead
With the new SRA Accounts Rules finally coming into effect on 25 November this year, it has become a high priority for solicitors to understand what changes are coming into force.
Here Robert Blech, Director at MHA MacIntyre Hudson, asks the question: Will solicitors, especially those involved in the finance aspect of the firm such as COFA’s (Compliance Officers for Finance and Administration), be spending the next month or so preparing for a transformation in how they account for client monies?
While the current offering of 53 rules details prescriptive obligations where nearly every potential accounts issue is made reference to, the new Accounts Rules have been reduced to only 13 and will be far less rigid. Illustrating this point, the 14-day rule, where earmarked monies sitting in client account are required to be transferred to office account within that time, will disappear altogether. The 13 new rules will address the matters which the SRA consider to be the most important in the protection of client monies.
The new account rules are the third of a three-phase review of the current rules and the protection of client funds. The first phase came into effect in October 2014 – changing the format of the Accountants Report, bringing in exemptions to certain firms and controversially removing the requirement for no qualified reports to be submitted to the SRA.
Phase two followed in November 2015, extending the exemption of those firms requiring a report to fully legally aided firms and those with reconciled balances below an average of £10,000 and a maximum of £250,000. More importantly, it advised accountants to use an “outcome-based” approach, along with a greater focus on risk as to whether there is a threat to the protection of client monies.
This, the third phase is a change to the rules themselves, moving away from their prescriptive and restrictive nature to focus on key principles and requirements for keeping client money safe. This should make it easier for new firms to enter the market and for the SRA to focus on higher risk areas, rather than “technical breaches” of the rules.
The new implications
The new rules include removing the term “office monies”, replacing it with “business” or “authorised bodies” funds, emphasising that residual balances are repaid to the client at the end of a matter and, by only using client monies for its intended purpose, ensuring firms don’t act as bankers. The preparation of client account reconciliations at least once every five weeks – which now need to be signed by a COFA or manager – remains a cornerstone for compliance.
There are also some specific changes, such as defining client monies as being “in respect of your fees and any unpaid disbursements if held or received prior to the delivery of a bill for the same”. The complexities surrounding treatment of “normal” and professional disbursements also disappear and there are circumstances where if the only client monies held are in respect of fees and disbursements, a client account does not need to be maintained.
How many firms this will apply to is unclear, but what do these changes actually mean in reality? The new approach allows each individual firm to decide for themselves how they protect client monies, using the key principles in the new rules as a framework. So if a firm has a policy for transferring earmarked monies which is slightly longer or shorter than the 14-day requirement, the new rules give the option of agreeing with clients to have flexibility to the payment of client monies into a client account and funds being available on demand.
Adaptation period and moving forward
In reality, in the early stages of implementation firms will probably struggle to adapt immediately and continue to follow the current prescriptive rules, instead of deciding alternative arrangements. There will probably be a period of confusion for the whole industry, as the new rules place no distinction in the treatment of residual balance payments to charity dependent on whether they are under or over £500. The likelihood is that there will be a cautious approach to self-governance with no immediate radical change, whilst having the correct systems and controls in place will remain key as ever.