One year ago today, on 25 November 2019, a significant revision to the SRA Accounts Rules came into effect alongside the new solicitor handbook. Three years in the making, this was the most dramatic revision of the Accounts Rules in 20 years; streamlining 52 rules into 13 and removing prescriptive detail so that firms could set their own systems and safeguards for client money to match their own risk profile.
One year on we’re taking a look back at the changes we’ve seen (or not) and highlighting some key areas of compliance that are commonly missed.
No major change on 25 November
Our first observation is that most of our clients did not alter their internal accounts systems and processes on the 25 November. In the build up to implementation, the SRA continuously stated that if your systems were compliant with the old rules, they would be compliant with the new rules. So, most of the practices we look after used the old rules to generate timescales and definitions for the new rules, albeit with some language changes.
Of the new rules that did require action from our clients, some were universal whilst others were specific to certain work types. Some of the changes were warmly welcomed, while others were widely criticised and brought confusion…
First up is the requirement that all accounts procedures must be written down. Regardless of how big or small your practice, you must have written policies to confirm your accounting practices and safeguards for client money. It is not enough to simply refer to the old rules and have these as your written policies.
If you haven’t formally written up your policies in relation to the new rules, you must act now. Your policies should cover all aspects of the new rules and any additional work you do. If you’d like support in reviewing these policies, talk to your usual Sagars contact for guidance about what we would expect to see covered.
Legal Aid Agency Money
Secondly, Rule 2.3 confirms that payments received from the Legal Aid Agency are client money, but they are not to be placed into the client account. For some of our clients, this has forced significant accounting systems change and the implementation of additional safeguards to avoid the money being mixed with firm money too early; credits on the business account have occurred as a result of this rule.
This point only applies to receipts from the Legal Aid Agency, not to all receipts on a legal aid funded matter, so third-party receipts on these matters must still be held in the client account until the rules permit their transfer to the business account.
Third-Party Managed Account
Thirdly, the rules now provide the opportunity for client funds to be held outside of a client account inside a Third Party Managed Account (TPMA). Rule 11 states the conditions for this, but the key benefit is that any funds held within a TPMA are not subject to the Accounts Rules.
We have not yet seen any of our clients utilise a TPMA to hold client funds instead of a client account, but we do know of TPMAs being used in the legal sector. At the time of writing, use of a TPMA has been restricted to specific clients and specific transactions, rather than a blanket use for holding all client funds. TPMAs do offer an alternative to holding client money for legal practices which are not required to hold client funds continually as part of their normal course of business.
Costs billed prior to withdrawal
One further area where we thought the new rules brought change was Rule 4.3. This required all costs to be billed prior to a withdrawal from the client account, extending the requirement from fees to include disbursements as well, creating a potentially significant increase in the admin burden for legal practices. The SRA eventually issued further clarification and sensibly restored the position back to what was acceptable under the old rules. For more information on this point please see the guidance from the SRA.
Key areas that haven’t changed under the new rules
Operating the client account as a banking facility continues to be at the forefront of the SRA’s concerns, with updated guidance only strengthening their stance that it is unacceptable in any form. For more information on this, you can read the SRA’s warning notice.
Keeping client money separate from business account money remains an essential safeguard within the Accounts Rules, along with only utilising it for the purpose for which it is held.
And finally, you must remember to return any excess client money to the client following the substantial conclusion of the matter and you must have appropriate systems in place to ensure this occurs promptly.
Our specialist professional practices team are experts in understanding the SRA Accounts Rules and supporting solicitors to apply them, get in touch with your usual Sagars team member if you have any queries or contact Joel Topham by calling 0113 297 6740 or email.