In May of this year the SRA finally announced that the changes to the Solicitors Accounts Rules will come into effect on 25th November.
Dramatically reduced from 52 prescriptive rules to only 13, these new rules will be far less rigid with a focus on what the SRA believes are the most important matters in the protection of client monies.
Following two other phases back in 2014 and 2015, this third phase and final set of changes sees the burden reduced for solicitors and law firms, allowing for greater freedom for them to use their professional judgement in considering how they meet the standards.
The key principles that run through the rules are:
1. Ensuring client money is always kept secure and separate from the firm’s money, and accounted for accurately and regularly.
2. Ensuring client money is treated correctly and for its intended use, a firm is not to be providing bank facilities.
3. Ensuring the prompt and safe return of any remaining client money at the end of the matter.
However, if you are thinking ‘great that sounds simpler and we don’t need to do anything’ – you are urged to read on!
Whilst they are shorter and allow more flexibility, there are a number of significant changes and one of the main concerns is that firms won’t bother to update their accounts procedures to adapt to the new rules or document their decisions or processes. It is imperative that the responsibility for a firm’s compliance with the new Accounts Rules and for the firm’s clients’ money comes from the firm.
From November 25th, the administrative burden on firms will change when operating a client account:
• The 14 day rule – can be replaced with a monthly, or daily, review.
• Disbursements – currently, the rules allow firms to transfer money from client account to reimburse themselves for amounts spent or incurred on disbursements without first issuing a bill. Under the new rule 4.3, firms will have to give a bill of costs, or other notification of costs incurred, to the client or paying party before they can transfer funds from client account. The SRA’s definition of costs includes disbursements.
• The notification of residual balances has been eased, but the new rules emphasise that this does not equate to offering banking services to clients.
So what would happen if a firm continued to follow the old rules and document that that is their decision? Will they be compliant?
Not completely. Whilst that might be more possible for the SRA Codes of Conduct, a firm will not be able to take all of the old rules and continue to comply with those and still comply with the new rules. Yes – they can take out the timeframes that are given in the old rules – the new rules don’t specify timeframes in the same way – and document these as their procedures; however there are fundamental changes which cannot be ignored.
What to do now?
• Familiarise yourself with the rules – there are only 7 pages!
• Check and review your firm’s systems and internal controls where appropriate.
• Ensure everything is documented.
• Consider an external compliance health check as an extra control.
What is it that you specifically need to consider? It is clear that all the changes need to be reviewed, but specifically firms, solicitors and support staff themselves will need to think about:
• How you will prevent yourself and your firm from falling foul of the rules prohibiting banking services when dealing with residual balances.
• Whether all staff understand the new definitions for client money and disbursements.
• What will be your firm’s approach to the new Standards and Regulations – are you going to revamp everything immediately and expect the whole firm to follow? Or would a gentler approach work – making the priority changes first and keeping everything else ticking along?
• How will training on the new rules and codes of conduct will be cascaded through the firm? How will you embed any changes you need to make so that your people understand what is now expected of them?
• Have you evidenced everything? This part is key. With more flexibility and the opportunity for your firm to make more of its own decisions around compliance, how will you document those decisions?
• That the focus of the rules is about the impact of behaviour rather than describing the behaviour.
An undefined framework?
The new approach puts each individual firm in the position of deciding for themselves how they protect client monies going forward using the key principles in the new rules as a framework; nothing is hard and fast.
In many respects this is helpful and feels less cumbersome and time consuming, but the likelihood is that, certainly in the beginning, firms will continue to just follow the prescriptive nature of the current rules, instead of deciding on alternative processes and practices. There are bound to be times of confusion too, for example the new rules can appear relatively vague after being so detailed before.
Legal Eye can help you sift through these changes and make them effective and efficient for you and your law firm, speak to one of our experts today.