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Legal team update - SRA Accounts Rules vs CLC Accounts Code

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25 July 2017

At the time of writing, we are waiting for the SRA to announce the findings from its consultation on “Removing barriers to switching regulators”, which closed in July 2016. Currently, any SRA-regulated practice wishing to switch to a different legal services regulator is treated as if it has ceased to practice. This then triggers the six years of run-off professional indemnity insurance (PII) cover, which means that the practice needs to pay an additional PII premium, typically amounting to around three times the annual premium.

Unsurprisingly, very few practices have so far moved from the SRA to another regular, such as the Council for Licensed Conveyancers (CLC), but if the SRA’s proposals go ahead then that could well change.

Who are the CLC?

Since 1985 the CLC has been able to issue licences to qualified individuals, allowing them to provide conveyancing services, and more recently, probate services. The CLC currently licenses over 1,200 individuals and 200 entities.

In many ways, the CLC is very similar to the SRA:

  • There is a CLC Handbook, which sets out the regulatory responsibilities of all CLC-regulated individuals and practices;
  • Its Code is principles based, and outcomes-focused, with a move towards entity regulation rather than regulation of individuals;
  • All practices regulated by the CLC are obliged to take out PII cover, with a minimum level of cover of £2m for each and every claim; 
  • Practices can convert to an Alternative Business Structure (ABS) to allow non-authorised persons to become an owner.

CLC Accounts Code

The CLC’s Accounts Code is a lot shorter than the current SRA Accounts Rules (18 rules running to 10 pages, compared to the current 43 rules and 52 pages, although this may be about to change of course), but has similar overriding principles, such as keeping client money safe, maintaining separate office and client ledgers, using each client’s money only for that client’s matters and keeping it separate from the firm’s money. The general theme of most of the Code is also very similar to the Accounts Rules, with requirements for maintaining accounting records, having readily ascertainable balances, no office credit/client debit balances, specific signed authority before client a/c withdrawal, etc.

There are, however, quite a few differences, including those shown in the table below:

 

 SRA Accounts Rules

CLA Accounts Code 

Compliance with additional guidance   
The Rules contain extensive additional guidance notes, which do not form part of the Rules and are not mandatory.

The SRA also publishes Guidelines on Accounting Procedures and Systems, and practices can be required to justify any departure from them.
No detailed guidance/supporting notes are contained within the body of the Code

A separate guidance document has been issued.  This is not mandatory, and the Code does not contain a requirement to comply or justify departures.
Transfer of earmarked funds and office money from client account A practice has 14 days to remove earmarked funds from client account once a bill has been raised, and 14 days to remove office money paid into client account. A practice has 28 days to remove earmarked funds from client account once a bill has been raised, and one calendar month to remove office money paid into client account.
Authority for client account withdrawals An appropriate person or persons can authorise withdrawals in accordance with the practice’s procedures.  The practice has responsibility for selecting suitable individuals.
Withdrawals can be authorised by an approved person, defined as:

  • authorised by approved regulatory body (e.g. licensed conveyancer or solicitor), or
  • any other appropriately skilled, trained and competent person of integrity who has been authorised by the CLC
Residual balances
The Rules include a requirement to return residual balances promptly, and specific guidance for donating residual balances is included within rule 20.2.

There is also a requirement to report to the client annually where a balance is withheld at the end of a retainer.
The Code includes a requirement to ‘account to the client as soon as possible after completion of any transaction or after a retainer has been terminated’. 

Lengthy guidance has been provided on ways to avoid or minimise residual balances.

CLC approval is required for all donations to charity, regardless of the balance.
Payment of interest / amounts in lieu of interest
There is a requirement to pay interest when fair and reasonable

Practices must have a written interest policy, which should be shown to clients at the outset of a matter.

Any client complaint relating to interest would be directed to the Legal Ombudsman.
There is a requirement to account to the client for interest earned or which should have been earned.

There is no requirement for a written interest policy

If directed by CLC, the practice must pay interest to client within 15 days of the CLC sending notification 
Client account reconciliations  Reconciliations must be performed at least once every five weeks.  They must be carried out as they fall due, or at the latest by the due date for the next reconciliation.  Reconciliations must be performed at least once in each calendar month, and prepared to a date not more than five weeks after the date to which they were last prepared.  They must be completed within seven days of the date to which they are prepared
Accountant’s Report – exemptions and filing requirements Exemptions are available where the practice is wholly Legal Aid, or where client monies held fall below the SRA’s thresholds.  Reports only need to be submitted where they are qualified, or for Cease to Hold reports. No exemptions are available, and all Reports need to be submitted to the CLC.
Accountant’s Report – test procedures Test procedures followed by Reporting Accountants are no longer prescribed.  Reporting Accountants are now required to use their professional judgment when deciding on which tests to carry out  Reporting Accountants are required to conduct tests and checks prescribed by the CLC
Reporting Accountant’s Checklist No longer required, now that Reporting Accountants can decide on which tests to perform. The Checklist needs to be submitted to the CLC with the Accountant’s Report.
 

This article, written by Andy Harris, Associate Partner at Hazlewoods, first appeared in Legalabacus July 2017 and is reproduced with their permission.

 


Andy Harris - Associate Partner
Andy Harris
Associate Partner Contact details