Introduction to the SRA Accounts Rules

Transcription

1 Introduction to the SRA Accounts Rules Factsheet No 19 April 2015

2 An Factsheet Introduction This factsheet is intended for fee earners and secretarial staff who need a better understanding of the Accounts Rules. It is not intended as the more detailed guide that Accounts personnel will need in how to manage their more specialist duties in managing transactions so as to ensure compliance with the Rules, but may nonetheless serve as a useful introduction for those taking up data processing roles within the Accounts department. This factsheet might prove particularly helpful to anyone stepping into the role of COFA. 2. The Basics In case you are an incoming COFA a reminder of the basics might be helpful. The COFA s remit is set out in rule 8.5(e) of the SRA Authorisation Rules. There is much similarity with the COLP responsibilities although, of course, the responsibilities are in respect of the SRA Accounts Rules 2011 and the protection of client money only, and not with the many broader elements of Handbook compliance. By way of a reminder, the COFA must: Take all reasonable steps to ensure that the body and its employees and managers comply with any obligations imposed upon them under the SRA Accounts Rules; Record any failures to comply and make these available to the SRA upon request; Report any failure that may be material either taken on its own or as part of a pattern of failures as soon as reasonably practicable; and Report non-material failures in accordance with rule 8.7(a) of the Authorisation Rules as part of the annual information requirements. Copyright Infolegal Limited

3 It is not a mandatory element of the COFA s role that they monitor financial integrity, so this responsibility will need to be added to the COFA s remit within your compliance plan or elsewhere where (as will usually be the case) this also falls to the COFA. 3. Pre-conditions and risks Traditionally many managers and other senior people in law firms do not concern themselves with day-to-day supervision of the accounts function of the business. This might be left to the Accounts staff, with the partners not overly concerning themselves as to their limited knowledge of the requirements of the SRA Accounts Rules. There has always been risk where this is the case and this could now be seen to be even more so and does seem to have influenced the SRA in determining some of the nominations it received for COFAs. 4. SRA Accounts Rules Basics The purpose of the rules is simple. They support compliance with the overarching mandatory SRA Principles and in particular the following: Principle 10 you protect client money and assets Principle 2 you act with integrity Principle 6 you behave in a way that maintains the trust the public places in you and in the provision of legal services Principle 7 you comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner Principle 8 you run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles. Copyright Infolegal Limited

4 5. A summary of the SRA Accounts Rules A summary of the main requirements of the Accounts Rules follows. Those sections of particular relevance to those in the fee earning departments are highlighted in bold and are expanded upon in the training presentation on the Accounts Rules which is also available on this website and which is available for viewing within subscriber firms. 1 Overarching objectives and underlying principles The overriding objective is stated to be to keep client money safe, but also that: client and office money are kept separate client monies are retained in an identified bank account each client's money is used for their purposes only proper accounting systems and records are kept 2 Interpretation This section lays down the basis of the rules. 3 Geographical scope There is limited application to practice outside England and Wales 4 Persons governed by the rules All employees of licensed and recognised bodies are included 5 Persons exempt from the rules There are limited exemptions for local authority employees and others 6 Principals' responsibilities All the principals in a firm must ensure compliance with the rules by the principals and by everyone employed by the firm. Copyright Infolegal Limited

5 7 Duty to remedy breaches Any breach of the rules must be remedied 'promptly upon discovery'. This includes the obligation to repay money improperly withheld or withdrawn from a client account from the partners' own resources if necessary. 8 Liquidators, trustees in bankruptcy etc This details the limited application for those acting in this regard and Court of Protection deputies. 9 Joint accounts This covers the situation where money is held jointly with the client when acting for them, or with another firm or a third party. In these circumstances the SAR do not generally apply, but there is a list of the records which must be maintained. The general rule is that 'a joint account is not a client account but money held in a joint account is client money'. If the joint account is operated by you then you will need to receive the statements and have possession of any passbooks. 10 Operation of client s own account This might arise under a power of attorney, in which case 'the rules in general do not apply', but there are certain requirements in relation to records. If operated only by you then you must receive the statements and hold the passbooks - if not then you must ensure that receive the statements or duplicates. 11 Firm s rights not affected to lien etc If you enforce your contractual rights you should not thereby be in breach of the SAR. 12 Categories of money In addition to client money and office money there is now out of scope money for ABSs. The definition and explanation of what constitutes client money at rule 12.2 is fundamental to the operation of the rules as a whole and the main principle that client Copyright Infolegal Limited

6 and office monies must be kept separately. Most notably client money is stated to include: payment for unpaid professional disbursements; payments on account of costs generally; and financial benefits to the firm which arise from dealing for a client, such as insurance commission. In relation to this last heading it should be stressed such monies are client funds even though they are payable to the firm - see also O(1.15) and IB(1.20) on this point. Confusion also sometimes arises in relation to personal matters that are being handled for the principals or any one of them, especially conveyancing transactions. Here rule 12(8) provides that any funds provided by the principal must be regarded as office money, but this does not apply to any funds from a lender in relation to the transaction, or if the principal is acting with their spouse or anyone else in which case the funds are to be treated as client money (see also rule 12.2(g)). 13 Client accounts The basic requirements are that any client monies should be held at a branch in England/Wales and described as such. Client money is regarded as all money which is not office money, and office money as 'all money which belongs to you or your firm'. Client monies are also stated to include financial benefits paid in respect of a client unless you have been authorised to retain it. 14 Use of a client account 14.1: Client money to be paid into client account without delay. This is usually taken to mean the same or the next working day at the latest. 14.2: This sets out the circumstances when office money can be paid into client account and includes, most importantly, a transfer from office account into client account of any interest which will be payable to the client in order that they Copyright Infolegal Limited

7 can receive one combined payment of the funds due to them and the interest rather than two. 14.3: Client money must be returned to the client promptly, as soon as there is no longer any proper reason to retain those funds. This provision is more likely to be enforced strictly by the SRA as a result of the growing concerns of clients using the firm's client account for money laundering purposes. There have also been instances of clients hiding funds in client accounts and then not declaring them in divorce proceedings. 14.4: Where it is necessary to retain funds at the end of a matter there is a need to promptly inform a client. in writing of the amount of any client money retained at the end of a matter. This might arise, for example, where there is an agreement to settle possible warranty claims within a contractual timescale. It is also a requirement that the client receives at least an annual summary of the amounts being held and for what purpose. 14.5: This rule provides that You must not provide banking facilities through a client account and should be seen as an adjunct to rule Money withheld at client s instructions In certain circumstances it is possible to hold client cash in the safe or have the funds in an account in the client's name or another party, but you may not seek 'blanket agreements' to do so. 16 Other permitted instances when money may be withheld from an account This sets out the categories of client money that may be withheld from client account, such as cash received from a client "in the ordinary course of business to the client or, on the client's behalf, to a third party". Also included are cheques and drafts received and endorsed over to the client or at their instructions, money withheld from client account under rule 15 and the receipt and transfer of costs: e.g. professional disbursements not yet paid mixed with costs or damages and costs. Copyright Infolegal Limited

8 17 Receipt and transfer of costs This important rule deals with the situation when you receive money paid in full or part settlement of a bill. It provides that you must determine the composition of the funds and, if all office money or client money be paid into the appropriate account "without delay" or, if it is mixed funds (e.g. your costs and an unpaid disbursement) you must follow rule 18. This requires that the receipt must be split between client and office accounts as appropriate or placed without delay into client account. The options are then: If office money and professional disbursements not yet paid then into office and within 2 days pay disbursement or transfer that element to office; or pay entire sum into client account and transfer out office within 14 days of receipt Rule 17.2 provides that you must first send a bill of costs to a client if you wish to withdraw costs from client account, and also provides that you must then withdraw the sum within 14 days at rule This latter provision is sometimes referred to in the terms of business of some firms. Rule 17.4 provides that receipts on account of costs are to be paid into client account, and are defined as client monies in rule 12.2, the one major exception being legal aid receipts. Rule 17.5 is another provision which has caused a good deal of confusion and deals with the payment of an "agreed fee" by the client. This is more than an estimate or even a quote for fees and is explained as being a fee which is "fixed - not a fee that can be varied upwards, nor a fee which is dependent on the transaction being completed". There must be written evidence of any such agreement and, most importantly, it must be paid into office account whenever it is received. This does seem a curious provision in that it can mean that the firm is paid in advance of doing the work, in which case the alternative is to take a sum on account of costs and place it in client account in the normal way and then transfer the funds when a bill is raised. Copyright Infolegal Limited

9 There is some leeway for misdirected electronic payments or transfers at rule 17(6). Rule 17.7 provides that costs transferred out of client account must be specific sums relating to a bill or other notification of costs and that "round sum withdrawals on account of costs are a breach of the rules". Finally, rule 17.8 covers the situation where trustees are within the firm and are therefore, in effect, billing themselves, and rule 17.9 provides that undrawn costs must not be used a "cushion" against future errors. 18 Mixed payments The general rule is that they will need to be split or paid into client account and transferred within 14 days 19 Legal aid receipts As legal aid expert Vicky Ling comments, the operation of the Accounts Rules in legal aid matters is "complex". For more see section 4.16 in the Solicitors Office Procedures Manual (second edition) which is available in the documents section of the Infolegal website. 20 Withdrawals from client account The main requirements are that the withdrawal must be properly required and withdrawn on client instructions (in writing or confirmed in writing). The provisions on payments of funds where the rightful owner cannot be identified or traced at rule 20.2 were amended in 2014 to increase the limit where specific SRA consent was not required from 50 to 500. Reasonable steps must still be taken to locate the owner, but this change to the rules has enabled many firms to regularise their client/matter print-out records. Copyright Infolegal Limited

10 21 Authority for withdrawals from client account Any withdrawal of client money requires a "specific authority in respect of that withdrawal" which has been "signed by an appropriate person or persons in accordance with the firm's procedures for signing on client account". The need to spell out who is authorised to request client account withdrawals is also now a requirement of the Lexcel standard (see 2.5.c). Withdrawals may not be by cash and must be to the office account or another suitable personal account Client interest, including the need for a policy The former Solicitors Accounts Rules 1998 permitted firms to retain up to 20 by way of interest earned on general account of costs. Rule 22 now requires firms to adopt a policy which they believe to be suitable in all the circumstances, and so depending on the nature of the firm, its clients and the amounts of money that are typically held in client account and for how long. The circumstances where it is not necessary to pay interest are set out in s.22(2) and include the situation where legal aid monies are held in client account. In practice most firms will follow the suggestion found in the guidance notes to this part of the rules that a de minimis 20 rule will apply, and this is the approach adopted in the Solicitors Office Procedures Manual and our separate Practice Note on the Retainer process. The same guidance also states that it is important to keep any such figure under review in the light of changing interest rates. Commercial firms in particular may wish to vary this limit to a higher sum in which case the guidance to be found at rule 23 should be taken into account and figure of 50 is commonly encountered. Since monies placed on specific deposit are required to be paid net of tax all such amounts must be paid to clients see note (i)(d) to rule 22 changes in the SAR. All firms should ensure that their policy on the payment of interest is set out in their retainer letters or terms of business documentation as a result of the specific requirement at s.22(3) that the policy on the payment of interest must be brought to the client s attention -see the Infolegal factsheet on retainers for a sample notice. Copyright Infolegal Limited

11 24-25 Interest on stakeholder funds and contracting out The main requirement when dealing as stakeholder is to account to them for interest unless specifically instructed otherwise and rule 25 also allows contracting out of the usual interest rules in certain circumstances. 6. Part 4: Accounting systems and records We will not cover this lengthy section of the Accounts Rules, but the COFA in particular should be familiar with section 29 of the Rules requiring proper accounting records to be maintained. The provisions extend to: Properly written up accounting records to show dealings with all client money and any office money relating to any client or trust matter Dealings with client money must be appropriately recorded in a client cash account or in a record of sums transferred from one client ledger account to another and on the client side of a separate client ledger account for each client Strict requirements apply in respect of the recording of monies held in a separate designated client account All dealings with office money relating to any client matter etc must be appropriately recorded in an office cash account and on the office side of the appropriate client ledger account Client money not held in sterling must be held in a separate account for the appropriate currency and separate books of account must be kept The current balance on each client ledger account must always be shown or be readily ascertainable from the records Provisions relating to the holding of a mortgage advance when acting for both lender and borrower must be followed Statements from banks, building societies and other financial institutions must be obtained at least every 5 weeks either in the form of hard copy documents or in a electronic format Copyright Infolegal Limited

12 Reconciliations must be performed at least once every 5 weeks in respect of client accounts A central record or file of copies of all bills and other written notification of costs must be maintained and be accessible Records of steps taken to trace clients and records of receipts of money donated to charity must be maintained where you withdraw money from client account under rule 20.1(j) Records of all documents, statements, central registers etc must be kept for at least 6 years from the date of the last entry. Originals or copies of authorities for the withdrawal of money from a client account must be kept for at least two years as must original paid cheques (unless you come to an written arrangement for the retention of these by your bank or building society) Central records must be kept in respect of the following accounts: Statements and passbooks for money held outside a client account or a central register of such accounts Records kept under rule 8 or a central register of all appointments Statements, passbooks etc relating to a joint account under rule 9 must be kept centrally or a central register of all joint accounts Central register of all withdrawals under rule 20.1(j) Records of a nominee company instructions Computerised systems are possible except in relation to specific documents such as original statements and passbooks Suspense client ledger accounts may be used only where you can justify their use, for example for the temporary use on receipt of an unidentified payment in order to establish the identity of the client. For more information on what will constitute a material breach of the Accounts Rules see the separate Infolegal Guidance Note on the Role of the COFA. Copyright Infolegal Limited

13 This Factsheet is copyright of Infolegal Ltd and is provided to you for use within your firm only. Please note also that this Factsheet is provided for information purposes only and further advice should be taken before relying upon its contents in relation to any specific issues or matter about which you have concerns. Infolegal Limited accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this Factsheet. No part of this Factsheet may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Infolegal Limited other than for use within your firm only. Would you benefit from in-house training on this topic? Many firms have done so already. If so, contact Matthew Moore, Director of Consultancy Services, at mattmoore@infolegal.co.uk. April 2015 Copyright Infolegal Limited