SRA’s Accounts Rules Review - What does it mean to firms?

June saw the SRA release their latest, in a long line of consultations, with respect to the Accounts Rules. Titled ‘Looking to the Future: SRA Accounts Rules Review’, it is expected to culminate in the publication of a set of new rules during the first half of 2017. These proposed changes are likely to be the biggest upheaval in the rules that we have seen so far. 

So, what is being proposed and how will this impact on firms and their compliance obligations?

The Proposal

The SRA are looking to simplify the Accounts Rules ‘by focusing on key principles and requirements for keeping client money safe, including:

  • Keeping client money separate from firm money
  • Ensuring client money is returned promptly at the end of a matter
  • Using client money only for its intended use
  • Proportionate stipulations on firms to obtain an annual accountant’s report’

 And how do they intend to achieve this? 

  • By making the Accounts Rules simpler and easier to understand, ‘increasing compliance and reducing compliance costs’
  • Changing the definition of client money (which is looked at in greater detail below)
  • Providing an alternative to the holding of client money through greater use of third party managed accounts (TPMA)

The Changes

Firstly, they propose to drastically reduce the number of Rules down to 13 by removing much of the prescription within the Rules. 

The biggest impact however is likely to come from the change in the definition of client money. The proposal here is that money paid in respect of fees and disbursements where the firm is ultimately liable for the third party payment (e.g. counsel fees), these amounts will no longer fall within the definition of client money and instead will be treated as the firm’s money and payable directly into the office account. Whereas funds received for disbursements for which the client is liable for (e.g SDLT) will remain in the client money definition and will continue to be held in the client account.

The SRA are also considering removing rules around how funds from the Legal Aid Agency (LAA) are dealt with, suggesting they would be purely managed through the firm’s own business accounts.

The Impact

There will no doubt be many arguments put forward both in support and against these proposals during this consultation period, but here are some of the most significant ways in which the changes could impact legal firms:

The greatest impact will undoubtedly be the cashflow benefits for firms in being able to utilise receipts in advance of costs and some disbursements. It will, however, also reduce some of the compliance burden, for example the commonly breached rule relating to the 14 day requirement for the transfer funds in respect of bills and also rules in dealing with funds in the office account for unpaid professional disbursements within the 2 days.

It is also expected that a number of firms will no longer hold client money, as firms who only hold funds on account of fees (and relevant disbursements), or who will now hold substantially reduced levels of client money may fall below the threshold and mean they will no longer require an accountant’s report.

From this change there have, however, been other concerns raised as follows:

There would be a potential increase in risk to clients given that payments on account will no longer be given the protection that the current client account affords them. If a law firm were to become insolvent during that time, there is the possibility under this proposal that the client would not be able to recover elements of those funds that they paid in advance. 

The SRA have suggested that clients can maintain protection of their funds by using credit cards to pay for these elements so they can then benefit from the protection provided under consumer legislation should a supplier then not provide an agreed service. Not all clients however want to, or have the ability to, pay by credit cards and in addition there is the increased cost that using a credit card usually incurs.

Similarly, the experts used by solicitors would in turn also be exposed to greater risk. Where a firm is suffering financial problems this change would mean that funds previously received to settle disbursements are no longer protected as they become part of the firms’ general cash resources.

To learn more about the SRA Accounts Rules or for any further enquiries please contact our Legal Services Director Stuart Littler on 0845 330 3200 or email stuart.littler@bennettbrooks.co.uk