24th December 2019
The new Solicitors Accounts Rules became effective on 25 November 2019. The aim of the Solicitors Regulation Authority (SRA) being to simplify the Accounts Rules, with the rules shifting to a more ‘principals-based’ approach for compliance for holding client monies.
Key areas to think about:
1) The ‘principals-based’ approach
The relaxation of the rules includes the introduction of the term “promptly” with regards to the transfer of client receipts and payments (previously the next working day and 14 days respectively). This means that finance teams should determine what they consider to be an appropriate interpretation of the new rules and to document this in their financial policies manuals, always bearing in mind the requirement to safeguard client monies.
2) The training of key finance team members
Finance team members that have involvement with client money will need to be trained in the new rules, be cognisant of any new internal policies set in accordance with the above, and along with the Compliance Officer for Legal Practice (COLP) and the Compliance Officer for Finance and Administration (COFA), ensure that fee earners within the firm are also complying with the new rules.
3) Residual balances (Rule 5.1(c))
Rule 5.1(c) of the SRA Accounts Rules includes the mandatory statement that client money can only be withdrawn from a client account on the SRA’s prior written authorisation or in prescribed circumstances.
The prescribed circumstances are limited to the withdrawal of residual balances of £500 or less on any one client matter, provided that the balance is donated to a charity of the firm’s choice and the other conditions of the rules have also been met.
Firms should therefore focus on returning residual balances to clients as soon as possible, post the finalisation of a matter and generally seek to reduce the amount of residual balances they hold for clients by reviewing client matters on a regular basis.
4) The implementation of robust IT controls to tackle cyber crime
Defence against cyber crime is one of the top priorities in protecting client money. Key finance team members, alongside the COFA, should strive to keep up to date with the threats faced by law firms and best practice to safeguard against these threats.
It is recommended that firms conduct reviews of their internal IT general controls, providing training to staff in order to build their defences against phishing emails and denial of service attacks. Awareness that fraud is both an internal and external risk is also encouraged.
5) Engaging early with the Reporting Accountant
As the financial year for your firm may span two different sets of rules, the Reporting Accountant may be required to sign off two AR1 forms to cover both periods. This is likely to be complex and require discussion of the firm’s implementation of the rules with the Reporting Accountant before the financial year comes to an end and prior to the review of the current reporting period.
Many of the areas highlighted above were key before the implementation date of the new rules, however, they are even more relevant now.
It is essential for the COFA to be aware of the administrative challenge that will face your firm, now that the rules are in place. This involves the training of finance team members and fee earners, and the implementation and documentation of robust internal policies and procedures, which will impact on workload.
In addition, the changes will need to be managed at the appropriate level, and if required, your firm should seek consultation with the Solicitors Regulation Authority and also engage with your Reporting Accountant sooner rather than later.
For more information about the new Solicitors Accounts Rules, speak with Samantha Gutu or your usual haysmacintyre advisor.