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Legal team update - All change for the SRA Accounts Rules

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6 June 2016

Last week the SRA issued its latest consultation document on the SRA Accounts Rules, in which it is proposing 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.

This is the third (and final) phase of the SRA’s review of the Accounts Rules, following:

a). phase 1 (October 2014) - some fairly minor changes to the format of the Accountant’s Report, and introduction of exemptions from the need to obtain a report at all for a small number of legal aid practices;

b). phase 2 (November 2015) - the more significant changes to the role of the Reporting Accountant and an increase in the number of firms able to obtain an exemption.

The new consultation document notes that “the length and complexity of the current Accounts Rules makes it difficult for new entrants to the market to understand what is required of them as well as consumers to understand what to expect when a firm handles their money. […] our Accounts Rules are too complicated and are not focused on the key risks to client money.” It also goes on to say that the proposals have “the potential to remove a barrier for new entrants who at the moment may be so intimidated by the detail, length and complexity of the current Rules they are put off from SRA regulation altogether.”

The SRA has produced a draft of their proposed Accounts Rules, which runs to six pages, and all of the old deadlines (next working day, two days, 14 days, etc.) have gone. For example, the current rule 17 (Receipt and transfer of costs) has been reduced from nine sections and 12 guidance notes to three sentences, and the current rule 29 (Account records for client accounts, etc.) has been reduced from 25 sections and 11 guidance notes to just five short paragraphs.

For those practices wanting more detail, the rules will be supported by an online toolkit, comprising guidance and case studies, to aid compliance.  The consultation document includes a list of the proposed areas of guidance, which includes topics such as “Name of client account”, “What is client money?”, “Who can make withdrawals from client account?” and “Requirements to pay interest”.

One of the most significant proposals is 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) will 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.

In response to concerns that this might make it more difficult to reimburse clients of firms in financial difficulty (as there may not be any money in the bank to refund clients), the SRA suggests that clients should make payment by credit card, so that they can seek a refund under the Consumer Credit Act 1974, i.e. making it someone else’s problem! Failing that, clients can contact the Legal Ombudsman or claim on the SRA’s Compensation Fund.

A potential complication, and one that the SRA does not mention in the consultation document, is that in theory firms may need to account for VAT on the funds when they are first paid into office account, rather than when their fees are billed, as this will represent an Actual Tax Point for VAT. Currently, most firms only account for VAT when they raise an invoice, as HMRC’s manuals specifically state that “the receipt of a payment into the client’s account does not represent receipt of payment for VAT purposes.”

The thresholds for obtaining an exemption from the need to obtain an Accountant’s Report are unchanged from the rules introduced last November, although the SRA’s document does note that they are planning to review the impact of the Phase two changes later in the year. 

Finally, the consultation document seeks to cement the SRA’s introduction of alternatives to the holding of client money, through the use of third party managed accounts. Not many people we speak to can follow this line of thought easily.

The consultation closes on 21 September 2016. Responses should be completed using the SRA’s consultation questionnaire (available at www.sra.org.uk/sra/consultations/accounts-rules-review.page), and can be emailed or posted to the SRA.

Andy Harris - Associate Partner
Andy Harris
Associate Partner Contact details