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Legal Update - SRA decisions on consultations published

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13 June 2017

The SRA published its decisions and consultation response documents today, following a series of consultations last year, involving extensive engagement with 11,000 people. The SRA Board has agreed:

  • New SRA Principles;
  • Two new Codes of Conduct – one for individuals and one for practices;
  • Solicitors will in future be able to offer non-reserved legal services outside of firms regulated by the SRA or another legal services regulator; and
  • Revised and streamlined Accounts Rules.

The changes will be incorporated into the new SRA Handbook, which is due for implementation in Autumn 2018 at the earliest.

Accounts Rules

Back in June 2016, the SRA issued a consultation document on the SRA Accounts Rules, in which it proposed a significant reduction in the length, detail and complexity of the rules, with practices to be given more freedom and flexibility to decide how they should look after client money.

The SRA produced a draft of their proposed Accounts Rules, with all of the old deadlines (next working day, two days, 14 days, etc.) removed.

One of the most significant proposals was a change to the definition of client money; so that money received in advance for the payment of the firm’s fees and disbursements for which the solicitor is liable (for example counsel fees and expert fees), would in future be office money. Under the current rules, money received in advance for fees is treated as client money, except where it is received in advance for an agreed fee.

It is clear from the SRA’s consultation response documents that the majority of respondents were strongly opposed to the redefinition of client money. Objections included the following:

  • Under the SRA’s proposals, there would be a significant reduction in consumer protection;
  • The proposed redefinition would be difficult to work with in practice;
  • Significant changes would be required to practices’ accounting software; and
  • Paying money for fees and disbursements into office account would represent a tax point for VAT, meaning that VAT would need to be accounted on the funds, regardless of whether they were due to the practice or not.

In response to these and other objections, the SRA has revised its position on the redefinition of client money. It has made some additonal changes to the proposed rules. 

The SRA has now published a new version of the SRA Accounts Rules 2018, running to seven pages and 13 rules, updated for the following:

  1. Money received in advance for the payment of fees and disbursements will continue to be client money, and should be held in client account until the point at which they are billed, i.e. no change from the current position;
  2. Where the only client money that a practice holds is in respect of advance fees and disbursements then the practice can elect to hold the money in its office account, provided clients are informed upfront of where and how the money will be held;
  3. The SRA has removed the reference to the practice’s COFA being jointly and severally liable with the practice’s managers (partners, members or directors) for compliance;
  4. All payments from the Legal Aid Agency can in future be held in the office account, including money received for unpaid disbursements;
  5. The SRA will no longer require a “Cease to Hold” Accountant’s Report when a practice ceases to hold client money (for example on a cessation), unless the SRA specifically requests one;
  6. The SRA are proceeding with their proposals to allow solicitors to use Third Party Managed Accounts (TPMAs).

For the majority of practices, this is all good news, as it will mean that they can carry on as they always have, with no changes to systems and processes other than those they choose to make to take advantage of the increased flexibility in the rules. For example, practices will be able to come up with new timeframes and deadlines around the banking of client monies, transfers for costs etc., if they so wish.

The changes will also be good news for practices merging, converting to LLP or incorporating to a limited company, as in future they will no longer need to have a separate 'Cease to Hold' audit, when all that has happened is a change in the client account title.

Andy Harris - Associate Partner
Andy Harris
Associate Partner Contact details