At first glance, most law firms may have thought that continuing to apply the existing principles will be acceptable to comply, however, there are certain specific changes that require further consideration. There has been some further guidance issued by the SRA, but the lack of detail in the rules means that complacency regarding the changes may result in breaches by your practice
All references are to the new rules unless stated otherwise.
There is no longer so many different treatments of types of disbursements. Previously we had professional, non-professional, paid, unpaid and incurred; and a mixture of each type was also possible, with different required treatments for each.
Rule 2.1(d) refers to ‘unpaid disbursements if held or received prior to delivery of a bill for the same’ as client money.
Rule 4.3 (a) refers to ‘you must give a bill of costs, or other written notification’ before using client money to pay your costs.
Non-professional disbursements such as search fees which under the previous rules may have been transferred to office when incurred, are now included within the word ‘costs’ and will now be client money until the bill is raised. In the reverse, if any disbursement has been billed, whether paid or not, it becomes non-client money.
This change may have cash flow implications on the practice as it is likely that disbursements will be transferred from client account to office account at a later date than under the current rules unless a decision is made to bill earlier.
One further change in the new rules regarding fees is that there is no longer the concept of an ‘agreed fee’, therefore these will remain as client money until the fees are incurred and billed.
Firms should have reviewed and considered their policies regarding disbursements and billing arrangements on a department by department basis. Considerations will include:
You will need to ensure all fee earners are aware of the policy changes and how matters will be dealt with to ensure compliance with the rules and that costs and disbursements can be transferred correctly and timely.
The new rules are much less prescriptive in terms of timescales and the word ‘promptly’ is used in a number of places instead, including:
COFAs should have considered how they have defined ‘promptly’. It is likely that the definition will be different for each of the above rules, and what has been decided should be documented and communicated.
Care will be needed here, as when considering ‘promptly’ in terms of rule 4.2, a COFA may want a little more wriggle room than at present and set a policy to transfer costs from client to office within 20 days. This may help with compliance requirements, but for commercial reasons, would that extension be a good idea or should a lower target be set instead?
If ‘promptly’ is not appropriately documented in your office manual, it will be difficult for your Reporting Accountant to check if you are compliant. Whether not having a documented policy becomes a reportable breach, will depend on the outcome of any testing undertaken and the frequency of issues discovered.
Although not an obvious change to the previous rules, rule 8.4 is extended to include a requirement for ‘other written notification of costs’ to be kept in a readily ascertainable central record.
The implication of this should have been considered when setting your policies regarding the transfer of disbursements if you make a decision to notify clients via email and letter, as noted above. Those written notifications will need to be kept centrally with the bills.
The replacement in the new rules of ‘instant access’ with ‘on demand’ regarding client money does present potential opportunities for firms to explore accounts with higher interest rates. Firms should start to explore the options that are open to them with their bank managers, but should note that ‘on demand’ may mean immediately so care around any notice periods and break clauses is required.
The new rule further extends to say an alternative arrangement can be agreed in writing with the client. Firms need to consider this route carefully, as there may be more administration involved in opening a separate account or deposit for a client, and consideration should also be given as to why a client would be asking for funds to be placed on deposit to earn a higher interest rate. You will need to ensure you are still holding the client money in connection with your regulated activities and that you are not simply providing banking facilities for a client. There will of course be high value cases where this may be appropriate.
The new rule 7 is more explicit in detailing that firms can make alternative arrangements with clients regarding the payment of interest.
Although firms will still need to ensure they pay interest when it is fair to do so, providing an alternative arrangement is made in writing, this is an opportunity for firms to review their interest policy and perhaps to consider increasing the de minimis limit for the payment of interest to reduce future administrative burdens if interest rates are to rise.
On first glance, the new rules appear to be silent on the subject of residual balances, but this will be governed by a clause in 5.1(c) which concerns withdrawals from client account ‘on the SRA’s prior written authorisation or in prescribed circumstances’.
We understand that the rules have been drafted in this way to prevent the SRA from needing to undertake consultations and obtain external approval for minor changes to the way that matters such as residual balances are dealt with. The SRA are therefore to rely on ‘prescribed circumstances’ to allow solicitors to continue to self certifying residual balance donations to charity – in other words their guidance that will be published on their website. As recently as October the SRA has released a statement on this area detailing the prescribed circumstances. It is important to note that this is a statement rather than guidance and can therefore be enforced in the same way as the rules.
The statement details the prescribed circumstances as follows:
Many firms have worked hard to reduce and resolve their residual balance issues since the current rules were introduced and it is important that that good work is not undone just because the rules are less explicit. COFAs should ensure that the file closure procedures of the firm are reviewed and documented for any changes that the practice intends to implement, and if the above expected ‘prescribed circumstances’ are not in the current policy then they should be included.
This also demonstrates how important it will be for firms to be continually aware of new guidance being posted online by the SRA in order to remain fully compliant. We will continue to include any new guidance or statements relating to the rules in our legal reading summaries as soon as we are aware of any changes.
Rule 11 regarding third party managed accounts (TPMA) appears to offer an opportunity to firms to outsource the handling of ‘client money’ to a third party. The rule states that when using a TPMA the firm is not holding or receiving client money.
The fact that the firm does not hold or receive client money, would on the face of it, suggest that there may be a reduction in the administrative burden for the firm, including not necessarily requiring an Accountant’s Report.
However, rule 11.2 also states that the firm would still need to ‘obtain regular statements … and ensure that these accurately reflect what has happened’. As it will still be the firm’s responsibility to check the transactions then there may be little reduction in the burden. In fact it could be more difficult to verify and check the transactions than if the money had been held in client account and the full rules followed in the first place.
TPMAs may be more suitable for newer/smaller firms, or firms who do not regularly hold client money and therefore do not have a client account. This may be particularly true, and develop in the future, for start up firms as they may decide not to have a client account unless absolutely required, as there is now an alternative available.
A further area where TPMAs may be particularly useful may be escrow or joint accounts, which now appear to be becoming more difficult to set up.
The new rules regarding joint accounts and the operation of client’s own accounts are not substantially changed from the previous rules and have their own new rules, 9 and 10.
However one change is that regarding the operation of a client’s own accounts is that rule 10.1 (c) includes that these accounts now need to be included in the reconciliations for the firm which as not previously the case. This may be difficult to achieve, particularly if (quite rightly), the transactions on a client’s own account are not posted to the firm’s client account ledgers.
The SRA has since issued further guidance on this area, in that they recognise that firms may not have access to monthly bank statements in order to carry out the reconciliations, and they would not consider that a breach providing that you take reasonable steps to record and satisfy yourself that the client’s money is not at risk and to record the position. You are therefore expected to:
It is also worth noting that the requirements around the old Rule 8 matters (liquidators, trustees in bankruptcy etc) have changed and these types of matters are now, in the main, to be treated in the same way as other more normal types of matters.
As is detailed above, the new rules require careful consideration, and steps to take include:
For more information on how the specialist Armstrong Watson legal sector team helps with the themes discussed in this article, please visit our website www.armstrongwatson.co.uk/legalsector.
This article is a general guide to the issues that we see in practice. It is not a substitute for professional advice which takes account of your personal circumstances. No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.
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For more information SRA rule updates, please contact Rosy Rourke on 07557 951148 or email email@example.com.Contact Rosy
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