Solicitors Accounts Rules 2011 – Sense at last?
22 November 2011
The Solicitors Accounts Rules 2011 have been simplified, but pitfalls remain for solicitors. Professor Roy Chandler explains key changes to the rules.
Ever since the first attempts were made to regulate the safe-keeping of client money, solicitors have stumbled on, and sometimes fallen over, accounting rules which often bemused even qualified accountants. Beginning in the 1930s, successive versions of the Solicitors Accounts Rules (SAR) for England & Wales have evolved bringing fresh concerns and worries with each incarnation. At last some semblance of common sense is beginning to emerge and the SAR 2011 for England & Wales have now been drastically simplified and are evidence that regulators are starting to take notice of the practical concerns of those who have to comply with the regulations. The area of solicitors’ accounts is acknowledged to be ‘high risk’ but the situation has been helped by the SRA introducing greater flexibility rather than prescription. Nevertheless, pitfalls remain and the unwary solicitor could easily be caught out. The aim of this brief article is to highlight the regulatory changes which are most likely to be relevant to the majority of practitioners.
The new SAR complements the new Handbook from the SRA which contains the 10 fundamental principles – the last but by no means least of which is ‘You must protect client money and assets’. The SAR 2011 retain the list of the principles which underlie the detailed rules such as the need to keep other people’s money separate from that of the solicitor. But to this list has been added the ‘overarching objective’ which, in an echo of the Handbook, is to keep client money safe. The list of definitions in Rule 2 ‘Interpretation’ has grown to take account of new business structures such as multi-disciplinary practices.
Rule 6 ‘Principals’ responsibility for compliance’ - now more clearly spells out that principals of the firm must ensure the firm complies with the SAR. The principal is accountable if those employed by the firm are found to have breached the rules.
The status of the footnotes which accompany many of the rules has been clarified – whereas before we were told that the notes formed part of the rules and were mandatory, now the opposite is true – the notes are not part of the rules. Nevertheless the wise solicitor will treat the footnotes as if they were rules since there is much practical value contained therein.
More substantial changes deserve to be given special attention. Subsection 3 of Rule 14 ‘Use of a Client Account’ now deals with a matter which had not been previously covered but which was standard practice in all well-run firms: client money which is no longer needed for any proper purpose must be promptly returned to the client. To comply with this, firms could have a regular review of aged client balances with questions being raised with fee earners whether there is a need to continue holding money on behalf of each client or whether if no further disbursement is anticipated and all fees have been transferred to office, the balance should go to the client. In some cases it may be necessary to refer the matter to the client to ask for further instructions. In any event, the new rules require to inform clients at the end of the matter if funds are still in hand and why they remain so and to provide the client with an annual account of the balance held where such retention is required over a long term.
Regular reporting of balances should deal with a problem which has long vexed legal cashiers - what to do with small, long-lived balances on client account - but life is rarely so neat and tidy and it is still possible that such balances will continue to be a headache. Subsection 2 of Rule 20 ‘Withdrawals from a client account’ allows solicitors to withdraw amounts not exceeding £50 from client accounts provided they have taken steps to trace the owner of the money, and made ‘adequate’ attempts to return the money to its owner or pay it to a charity. Alternatively you may wish to apply to the SRA for authorisation to make the withdrawal and you must follow this route if you are seeking payment of your fees but cannot deliver a fee note or bill because the client cannot be traced.
Under subsection 22 of Rule 29 ‘Accounting records for client accounts etc’, you must keep a record of the steps that have been taken to trace the client and keep a central record detailing the name of the client whose matter gave rise to the leftover funds, the amount, the name of the charity to which the balance was paid and the date when it was paid.
The biggest area of change is in Part C of the SAR – Interest. Traditionally this was the least well complied with part of the whole of the SAR. This was often the starting point for regulators and investigating accountants since it was the most likely area to turn up instances of non-compliance. This was because this part of the SAR was poorly written and cumbersome.
The new SAR have done away with the table setting out on a sliding scale amounts of client money and periods of time for which the money had to be held before the solicitor had to calculate whether a payment in lieu of interest was due. Rule 22 ‘When interest must be paid’ – now is straight-forward, at least it appears to be so: ‘you must account to the client for interest when it is fair and reasonable to do so’. There is no longer the question of whether the money was held in a separate designated account or the general client account. This simplification has introduced what the SRA terms ‘flexibility’ but in order that solicitors can be seen to uphold the Handbook principles including acting with integrity and with the best interests of each client, some safeguards are required. Rule 22(3) says that you must have a written policy on the payment of interest and that the terms of the policy must be drawn to the attention of the client at the outset, unless it is inappropriate – though it is hard to imagine when that might be.
A relic from an earlier version of the SAR – the £20 de minimis as a threshold below which amounts in lieu of interest were not previously required to be paid to the client - refuses to die gracefully. It reappears in a guidance note, though this is not part of the rules, remember, as an example of an option which ‘some firms may wish to apply’. Rule 23 ‘Amount of interest’ - tells us that in setting the rate of interest due to the client we should consider not only the amount and the length of time for which it is held but also the need for instant access.
The new approach to interest payments may be flexible but it is fraught with danger unless you make things quite clear to clients. An aggrieved client who feels that he or she has been short-changed, now has the option of complaining to the Legal Ombudsman. Remember also that you cannot expect your reporting accountants to provide you with assurance that you are compliant with the rules on interest, since it is no part of their work to check the adequacy of your interest policy. However, you can rest assured that if they were to discover a substantial departure from the accounting guidelines which are appended to the SAR and which do cover interest, they will report that fact to the SRA. For these reasons it is vital that you get this right from the outset. Failure to do so could be costly.
Professor Roy Chandler is Professor in Accounting at the Cardiff Business School
Read the Solicitors Accounts Rules 2011