SRA Accounts Rules compliance: Banking Facilities and Residual Balances

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I was interviewed recently by Law Firm Ambition about my views on the most common questions I come across in respect to mergers/accounts rules. Below, I'll focus on questions around residual client balances and rules on providing banking facilities. You can read my answers to the previous questions here:

Questions 1-5: FAQs - SRA Accounts Rules compliance for law firms
Questions 6-10: Breaches and Cyber Security 
Questions 11-15: Internal Reviews 
Questions 16-20: Accountant's reports

 

21. What steps do I need to take before paying any residual client balances to charity?

Rule 14.3 of the SAR requires client monies to be returned to the client once their matter is complete. Although this sounds simple, there are many occasions where client funds remain unclaimed.

Since October 2014, residual client balances under £500 can now be dealt with by the practice without authorisation from the SRA. However, certain steps still need to be taken before paying that money to charity.

Firstly, you must establish who the owner of the funds is and make reasonable attempts to trace them. What is reasonable should be assessed with reference to the amount of funds held and the costs associated with tracing them.

If your client can be traced but fails to cash the cheque/provide instructions etc, you should advise the client that you will apply to the SRA for authority to pay the money to charity and will do so unless you hear to the contrary within a stated and reasonable amount of time. A record of the steps taken should be kept.

If your client cannot be traced, providing the balance is less than £500, you should donate the money to charity. You should maintain a central register which details the name of the client, the amount held, the name of the charity and the date the payment to charity was made.

Should the amount held exceed £500, then SRA approval is required. The SRA will need to know the name of the client, the amount held, the length of time the amount has been held and what attempts you have made to contact the owner.

 

22. What steps can I take to prevent further residual balances occurring in the law firm?

In order to prevent further residual balances occurring, the practice should have a robust file closure procedure that does not allow files and matters to be closed where client money is still held.

The practice should agree at the outset of the retainer about how surplus funds will be dealt with. This may be included in your client-care letter or terms and conditions.

Gathering additional information from clients to allow them to be traced, such as a national insurance number or their bank account details in order to make direct payments, may also be useful. Remember, being unable to trace your clients may be viewed as poor practice management.

Finally, if you are involved in a merger or acquire another law firm practice, you should not accept liability for any client money which does not have an accompanying client file and details.

 

23. What are the rules on providing banking facilities through a client account?

A practice must not provide banking facilities through its client account. Any client money transaction must be related to an ongoing legal transaction or to a service as part of your regulated activities.

Throughout your relationship with the client, you should question why you are receiving or holding funds and for what purpose. Your client account is not there for the client’s convenience.

The rules reduce the risk of money laundering through the client account. In addition, by providing banking facilities to a client you may inadvertently be helping them shield monies from an insolvency situation or facilitating financial, tax or benefit fraud.

 

24. When would our reporting accountant need to qualify our Accountants’ Report and submit it to the SRA?

Since November 2015, the SRA has modified its approach to the accountant’s report, and now only requires qualified reports to be submitted. Your accountant will be expected to use professional judgement when preparing the report and in deciding if it should be submitted.

The SRA’s view is that reports should only be submitted where the breach is material and client money is at risk. A material breach may be one where there is intention to breach the rules, or if there is a significant weakness in the processes and controls in the practice which has led to the breach.

Most firms will have trivial non-reportable breaches. These should still be monitored by the practice in their breach register and reviewed by the reporting accountant, as repetitive trivial breaches may indicate poor systems and controls.

In addition, under the current rules, all ‘cease to hold’ reports (if your firm ceases to hold client money) must also be delivered to the SRA. This applies whether a report is qualified or not, and even if the practice still exists but has only changed its legal entity (such as on incorporation).

 


If you have any unanswered questions about SRA Accounts Rules, contact Huw Nicholls.

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