Earlier in the year the SRA opened a consultation in respect of some amendments it wanted to make to the 2019 Accounts Rules. Following their review of responses from various external parties, the SRA have now released a notification of what they intend to change.
Subject to Legal Services Board approval these amendments will be introduced from 1 November 2023.
Notification to client, before client to office bank account transfers
The first amendment relates to the required steps prior to transferring funds from the client bank account to the office bank account in respect of the firm’s fees and any unpaid disbursements.
This will allow a firm to take monies in respect of its fees and unpaid disbursements, without firstly having to deliver the bill to the client. This is however only permitted should the following criteria be met:
- The client has previously received written notification of the amounts involved; and
- The amounts to be transferred have been incurred by the firm prior to the transfer taking place.
The proposed amendments to this and the relevant rules amended are shown below.
Rule 2.1(d) – Definition of what client money is:
“Client money is money received or held by you in respect of your fees and any unpaid disbursements if held or received prior to the delivery of a bill, or other written notification, for the same once these have been incurred.”
Rule 4.3(c) and Rule 4.4 – Definition of situations where can withdraw money to the office account:
Rule 4.3(c) – “Where you are holding client money and some or all of that money will be used to pay for your costs: any such payment must be for no more than the specific sum identified in the bill, or other written notification, of the costs incurred, and covered by the amount held for the particular client or third party.”
Rule 4.4 – “Rule 4.3 does not apply where you withdraw client money from a client account in full or partial reimbursement of money spent by you on behalf of the client, or third party for whom the money is held.”
This should aid firms with some small cashflow efficiencies, allowing client to office transfers to occur slightly earlier than has historically been the case.
The key element here is that the client has been informed and has agreed to the levels of fees prior to the transfer taking place, and importantly, that the disbursements have been incurred by the firm.
Operation of a client’s own bank account
Secondly, there is an amendment to be made to Rule 10, regarding the operation of a client’s own bank account. The SRA had suggested an approach to be introduced where 4-monthly reconciliations were to be required on all such bank accounts operated by the firm.
The SRA have taken on consultation responses saying that this was not achievable, therefore this is not to be implemented. Instead, the SRA are wishing to bring this rule in line with Rule 9 (Operation of joint accounts). This will mean that the new Rule 10 will read as follows:
“If, in course of practice, you operate a client’s own account as a signatory, Part 2 of these rules does not apply but you keep a:
a) central register of the client’s own accounts that you operate;
b) separate record of the transactions carried out by you or on your behalf in respect of the client’s own account; and
c) record of your bills and other written notifications of costs relating to that client’s matter”.
The key here in terms of a firm’s compliance with this Rule, and for our audit testing, will be the robustness of the controls in place regarding these matters.
Given that the firm, or somebody within the firm, has sole authority for operating the client’s own bank account the heightened risk level in respect of these matters is evident.
As such, we would expect that the following procedures and controls are being considered by the firm:
- Checks are in place to confirm that the central registers and records of transactions are up-to-date and complete;
- Reviews are performed by people within the firm, separate to the fee earner working on these matters; and
- Bank statement reviews (if bank statements can be obtained on these matters).
Firms should be checking that there is no fraudulent activity on these matters, that transactions are in line with those generally expected to be seen on this type of account, and the transactions records tie back to bank statements.
These amendments, alongside other non-Accounts Rules amendments can be seen here.
How can MHA help?
If you would like any further clarification in respect of these or guidance as to how your firm could improve its procedures to be compliant with these, please contact our specialist SRA Accounts Rules Managers by filling in the form below.
