The Solicitors Regulation Authority has recently confirmed, that the changes of the SRA Accounting Rules will be effective from 25th November 2019. These new reforms were approved by the Legal Services Board (LSB) last year and are part of the Looking to the Future programme, allowing solicitors greater flexibility in how they work.
The new SRA Accounting Rules are designed to be far more outcome-focused, and are shorter and more targeted than the existing rules. They continue to focus on the protection of client money but with the freedom for solicitors to use professional judgement in considering how the standards are met, by applying simpler accounting rules that focus on the principles of safeguarding client money, rather than lots of specific technical rules.
November will also see the SRA Digital badge becoming a mandatory requirement for all regulated firms who run a website. Further information is available on the Solicitors Regulation Authority website.
Under the current rules, period controls are specifically described, for example the transferring of costs within 14 days and the banking of client monies by next working day. However, under the new rules, these period controls have been replaced with the word “promptly”, leaving it open for you as a firm to decide what “promptly” means to you.
This also means that you could make the decision to continue using the old rules period controls for handling client money, as long as all areas of the new rules have been considered and changes made where necessary.
The SRA has promised some form of guidance in addition to the new rules. However, we have not yet received any confirmation when this will be nor what form, this will take.
Significant Changes to the SRA Accounting Rules
- Under the current rules, firms can transfer money from client account to reimburse the firm for incurred or paid disbursements. However, under the new rules (4.3) firms must provide a bill of costs or other notification of costs incurred to the client or paying party first, before the transfer of funds can be completed. The definition of costs includes disbursements.
- The current rules include a section on the dealing of residual client balances. However, these are now silent under the new rules with only rule 2.5 referring to the prompt return of client money as soon as there is no longer any proper reason to hold those funds.
Other Key Changes to the Rules
- The number of rules has been reduced to 13, compared to the current 52.
- Changes in what is classed as client money under certain circumstances means some firms may not be required to hold client bank accounts. This includes money received in advance for fees and disbursements (where they are the only client monies held and clients are informed in advance) and money received from the Legal Aid Agency.
- Professional disbursements are currently considered separately to disbursements. However, it appears all disbursements will be treated in the same way under the new rules.
- Agreed fees are no longer considered as separate to costs. Under the new rules, agreed fees are classed as client money until the bill is raised (unless the firm follows the changes in point 2).
- The new rules now formally require the COFA or manager of the firm to review and sign off the client account reconciliations. Any differences on the reconciliation should be investigated and resolved promptly.
- Firms running client’s own accounts will now be subject to reconciliations every five weeks. Considerations will need to be made on how this is completed as it is unusual for these accounts to be recorded on the client ledgers.
- New rule 11 specifically refers to the use of TPMA’s (Third Party Managed Accounts). You are permitted to enter an arrangement with your clients to the use of a TPMA. You however must still ensure to obtain regular statements from the TPMA provider and ensure these accurately reflect all transactions on the account.
Considerations in Advance of the Rules
We recommend that all firms review the new rules which are available on the Solicitors Regulation Authority’s web page, to ensure you are comfortable with the changes due to commence from the 25th November 2019. Below are some considerations to be made for the more common process changes required under the current rules:
- Firms that current rely on the transferring of incurred and paid disbursements for cashflow purposes or as part of their usual cashiering procedures, need to consider the new rule 4.3 on billing or notifying clients in advance of transferring these costs. Changes to the current process will be need to be considered to either;
- first supply disbursement only bills, or
- only transfer costs on the creation of a final bill
- Under the new rules the concept of unpaid or incurred disbursements has been removed, meaning disbursements are only to be considered as disbursements when paid.
- Defining the meaning of “promptly” for your firm. Under the new rules, “promptly” is referred to on the banking of client monies received, and on the transferring of office monies from client account for costs (this includes disbursements). As a firm you will need to consider if you are required to adopt changes to adhere to this rule. It is recommended that documented systems and controls are in place to ensure the definition of “promptly” is familiar to all.
The Cashroom Clients
The Cashroom offers recommendations for adherence to these new rules and provide advice on the creation of a suitable policy to ensure compliance for our clients. If you are interested in what The Cashroom can offer, please get in touch…
Head of Cashiering England and Wales