Solicitors Accounts Rules are facing their biggest overhaul in over 20 years. The new rules will come into immediate effect on 25 November 2019, meaning changes to law firms’ systems and procedures will be required. Mitchell Charlesworth partner, Mike Buxton gives an overview of the changes and provides some useful guidance on how law firms should get ready for the changes.
At first glance, it seems as though the new guidance is simply a rehash of the old guidance, but there are quite a few elements to be aware of. It is vital that law firms give due thought to the implications for their accounting procedures and systems for dealing with client money starting from 25 November 2019 to ensure continued compliance with the rules.
The existing, highly prescriptive rules are being reduced to just 13 shorter rules. The new, shorter rules offer law firms, of differing shape and size, the flexibility to introduce new systems and procedures that both protect client money, as well as introducing practicalities for the firm.
This flexibility, whilst offering a lot of positive changes for law firms will not be without its challenges. Implementing principles-based policies via a system geared to ensure compliance with highly detailed rules requires both thought and discussion. Naturally, there will be some upheaval in changing procedures, but firms should embrace the opportunities the changes present, for example, new systems that will save administration time whilst still being able to demonstrate overall compliance.
Changes to be aware of are:
→ Third-party managed accounts (TPMAs)
The introduction of TPMAs as a means for managing payments and transactions. The SRA expect to be notified when a firm uses a TPMA (via their TPMA form) and be kept up to date on any changes you make.
There are various references to ‘promptly’ in the 13 new rules. A principles-based approach allows the firm to apply their own interpretation of what constitutes as ‘promptly’. Thus, there are now no prescriptive time frames to adhere to, which allows firms to implement their own to suit their particular practice size and requirements.
→ Transfer of client monies for costs
The 14 day rule for transferring money earmarked for costs has now also be replaced with the word ‘promptly’. Particular care and attention should be applied in circumstances where billed costs become the firm’s money, as the principle of separation applies, meaning the money should not ‘languish’ in the client account. Again, firms must establish and document what they perceive to be a ’reasonable timeframe’. Whichever timeframe is agreed, this should specifically form part of policy, and cannot simply be implied.
What should law firms do to prepare for the changes?
As a starting point, each COLP, COFA and accounting team should read the new rules along with the available guidance on the SRA’s website, which can be found here. In short, law firms now need to ensure:
→ Client account reconciliations:
There is evidence of review of differences on the client account reconciliations. This should be conducted by a manager or the COFA. Whereas in the past this was recommended as best practice, this now forms part of the rules.
→ Credit balances:
There is evidence of regular review of credit balances on the office side of the ledger, ensuring client money is not incorrectly held there.
→ Closing files:
They establish and maintain up to date written processes that ensure client files are properly and promptly closed and balances repaid on a timely basis. We would suggest that this is part of the file close down procedures and this is completed after a short period, say 30 days. This is good housekeeping and should be kept up to date.
→ Client money retention:
There are systems in place to ensure client money retained is for proper reason and there is ongoing notification.
We expect that the changes will evolve over time and we anticipate further guidance from the SRA and other governing bodies, including the ICAEW, in the coming months.