Legal update: The SRA's compliance conference

Published: Tuesday 17 December 2019

The SRA’s compliance conference was held less than a month before the new regulations came into force. We wanted to give you some of our highlights from the day.

Suspense accounts

The new rules do not specifically mention use of suspense accounts. However, using suspense accounts to hold client funds for long periods of time has implications from a money laundering perspective. Funds should be returned to source if you are unable to identify the owner within a short period of time.

Client’s own accounts

The SRA brought in the rule regarding reconciling client’s own accounts in response to the case of Andrew Taylor, who was found to have swiped money from a client’s own account to fund his own lifestyle. The practice note addressing the requirements of reconciling the client’s own accounts was released after there was ‘a lot of noise’ about firms being unable to comply. Subsequently, they have had feedback from other lawyers who think that all firms should be able to reconcile their client’s own accounts. This notice is not permanent. The SRA are going to continue to review this with a view to finding a suitable middle ground.

Acting as a bank

The SRA are hoping the changes will allow reporting accountants to use their professional judgement in performing the annual audit. The accountants should be designing tests which are specific to each firm and the risks that they face but should always have a focus on where accounts may be used as a banking facility.

They have removed the requirement to write to clients on an annual basis where funds are being retained. If funds are being held onto for a long period of time, then there is a risk that the firm is acting as a bank. It is not enough to write to clients on an annual basis to get around this. The rules also clearly state that there is a requirement to return money when there is no longer any reason to hold them.

Residual client balances

A lot of the qualified Accountant’s Reports that they receive at the SRA now include residual client balances. The SRA are unlikely to take action where the firm is aware of the balances, and able to demonstrate that they are dealing with them. Where the reporting accountant has included residual balances on the Accountant’s Report for three of four years in a row, then the SRA are more likely to get involved. The prescribed circumstances, which deal with donation of residual balances are mandatory, and not just guidance. 

Self-reporting

It is essential that firms’ office manuals meet the new requirements. The SRA also wants firms to consider where they might have some opportunities to change. Firms need to use their professional judgement and be able to justify the decisions that they have made. 

Internally, a report should be made when it is considered that there is a risk to client money. As we know the SRA have release new codes, and these are now divided between those relevant for individuals, and those for firms. It is now the obligation of all individual solicitors to report serious breaches. The responsibility does not lie with the COFA for reporting any more. Any individual within the firm should report if they think the SRA could/should investigate a breach. You cannot stop any individual from reporting if they want to. It is up to the SRA to decide whether there has been a breach or not, but they confirmed that they would always want to know if the firm had been victim of a cyber attack. 

Other areas

It obviously wasn’t just the SRA Accounts Rules which changed from 25 November. Other areas to make sure you have familiarized yourself with are:

  • We no longer have the indicative behaviours. Instead, the SRA is planning to make more use of case studies, as we saw with acting as a bank last year.
  • Guides have also been issued for enforcement in action. It is worth looking over as it covers expectations of regulated individuals in elements of their personal life, as well as at work, such as use of social media and drink driving.
  • 6,500 law firms undertake work that the SRA consider to be high risk, primarily consisting of conveyancing. These firms are going to be contacted in respect of compliance with anti-money laundering, so make sure your policies are up to date. 
  • Around 80% of firms are now complying with the pricing transparency requirements (although they are compulsory for all!) but many firms are still falling short on the level of detail shared. Particularly when it comes to VAT and disbursements

If you would like any help in making sure your firm is compliant with the new regulations, please do get in touch.

Key contacts

Jon Cartwright
Jon Cartwright
Partner
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Patricia Kinahan
Patricia Kinahan
Partner
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Andy Harris
Andy Harris
Partner
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Jenny Staight
Jenny Staight
Associate Director
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