It is now over three years since the SRA Accounts Rules changes in November 2019, long enough to analyse what the most common breaches are under the new rules.
Sadie Archibald, legal sector assistant manager at accountants Armstrong Watson, reveals the six most common breaches her firm has seen and suggests the steps needed to avoid them. (27 June 2023)
1. Residual balances
Rule 2.5 states: You ensure that client money is returned promptly to the client, or the third party for whom the money is held, as soon as there is no longer any proper reason to hold those funds.
Residual balances remain the most common breach we see. Often, the first attempt to return funds is not until just before the year-end that is under review.
For example, a £50 residual balance is held on account since the end of a matter in January 2021. There are a number of internal communications on file from the accounting team to the fee-earner and vice versa, however no communication is made to the client until November 2022.
There is no de-minimis for residual balances, so all balances irrespective of the amount need to be dealt with ‘promptly’. The rule states that the money should either be returned, or, if there is good reason to retain it, the solicitor should write to the client to explain how much is being held and why — and write to confirm that annually thereafter.
The internal procedure we mostly see is the accounts department sending a weekly/monthly email to fee-earners to review. Unfortunately, more often than not this just becomes a routine and no actual progress is made.
Action: Run weekly reports with specific tasks set; and ensure the fee-earners are aware of the consequences of not dealing with these residual balances.
2. Office credit balances
Rule 4: Client money must be kept separate from money belonging to the authorised body.
There are a number of valid reasons for office credit balances; for example, refunds from third parties, or clients paying funds directly into the office account. The funds, however, must be transferred from office to client account ‘promptly’. Although the interpretation of promptly varies from firm to firm, office credit balances should not extend to more than a few days, ideally being transferred to the client account on the same or next working day.
Action: Run weekly reports on the office credit balances and resolve any issues immediately.
3. Payments to charity
Rule 5: Withdrawals from client account.
It can be tempting to transfer small balances to charity rather than going to the trouble of returning these sums to clients, due to the administrative time involved. The cost of sending a payment can sometimes outweigh the balance itself.
But like Rule 2.5, there is no de-minimis level. Your firm is still required to attempt to return the money, or else client authority is required for paying such sums to charity — however small the balance.
Action: Run a monthly residual balance report. Identify any small balances that could be cleared and email the client to ask if they would like the money returned to them (perhaps offering to pay the money to charity as an alternative for tiny sums).
4. Duty to correct breaches upon discovery
Rule 6: Duty to correct breaches upon discovery.
In its annual review, a reporting accountant will check whether any breaches noted in the previous year’s report have been dealt with. This typically occurs with breaches relating to:
- Suspense ledgers
- Immaterial historical balances
- Residual balances
Action: Complete the actions to correct any breaches promptly following receipt of the report.
5. Suspense ledgers
Rule 8: Client accounting systems and controls.
Suspense ledgers are perfectly acceptable and beneficial when used correctly. But these ledgers should regularly be brought down to £nil, as they are only to be used on a temporary basis.
Action: If a suspense ledger cannot be brought to £nil, perform a reconciliation so that any historic unidentified balances can be investigated and cleared.
Rule 4.3: Where you are holding client money and some or all of that money will be used to pay your costs:
- you must give a bill of costs, or other written notification of the costs incurred, to the client or the paying party;
- this must be done before you transfer any client money from a client account to make the payment; and
- any such payment must be for the specific sum identified in the bill of costs, or other written notification of the costs incurred, and covered by the amount held for the particular client or third party.
A recurring breach is costs for disbursements being transferred without a notification of costs or a bill being provided to the client.
Action: A notification of costs can include advance notice in a client care letter; but if adopting this approach, the specific sum must be identified, otherwise a separate notification of actual costs is required.
(We understand that the SRA has identified that this can be time consuming and is currently reviewing this rule.)
Help from the SRA
The Solicitors Regulation Authority are happy to provide any advice, whether specific or general. Approaches can be made on an anonymous basis, as they do not ask for your details. The SRA can be contacted as follows:
Professional ethics helpline for solicitors: Call 0370 606 2577 (Monday to Friday: 10.00 - 13.00 and 14.00 -16.00)
www.sra.org.uk/ Web chat Monday to Friday: 09.00 -10.00 (closed Wednesday), 13.00 -14.00 and 16.00 -17.00
You can also contact professional ethics by emailing [email protected].
This service is provided by solicitors experienced in various areas of law, offering advice on the Standards and Regulations to solicitors, trainees and solicitor apprentices.
Why do law firms choose Armstrong Watson?
It’s because this accountancy firm has built an outstanding reputation in the legal sector, working as preferred partner of the Law Society.