Strengthening client money safeguards: What the SRA’s new proposals mean for law firms

The SRA has issued its proposals to strengthen controls over client money, aimed at boosting public confidence and trust in the legal sector, against a background of rising claims against the compensation fund and increased merger and acquisition activity.

Aileen Armstrong, the SRA’s Executive Director for Strategy, Innovation and External Affairs, explains:

“We know that the vast majority of firms act responsibly. At the same time, we have seen issues in the market, as well as cases where client money has been lost, which highlight that we all need to take further action to strengthen the safeguards for clients and their money.”

The proposals focus on two key areas: the Accountants’ Reports Regime and checks and balances within firms. We explore both in greater detail in this article.

Key changes to the Accountants’ Reports Regime

The SRA recognises that the Accountants’ Reports Regime plays an important role in safeguarding client money, by providing independent, professional scrutiny of firms’ compliance with the Accounts Rules, with a particular focus on the systems and controls put in place around client money. However, data shows that not all obligated firms are complying with the requirement to obtain an accountants’ report. A spot check of 596 firms found 25 non-exempt firms had not obtained a report, and 31 were late.

Proposed changes include:

• All reports, including unqualified reports, to be submitted directly to the SRA by the reporting accountant.
• Introducing an annual declaration confirming exemption status or compliance with the regulations.
• Fixed penalties for non-compliance.

Compliance Officers for Finance and Administration (COFAs) are likely to welcome these changes. They carry out a difficult role and having a good relationship with a Reporting Accountant, who can provide advice and support throughout the year, can be invaluable.

Strengthening internal checks and balances in law firms

The SRA wants to reduce risks where management, ownership and compliance roles are concentrated in one individual.

Proposed changes include:

• Anyone who can unilaterally determine or direct significant management decisions in a firm cannot also be the Compliance Officer for Legal Practice (COLP) or COFA. This will apply to firms with turnover above £600,000 and/or client money holdings over £500,000 during the reporting period.
• There will be an exemption for sole-owner firms with turnover under £600,000 but holding over £500,000 in client money, which would allow the owner to act as COLP but not COFA.

The SRA acknowledges that sole owner firms may find it difficult to identify suitable alternative compliance officers internally, resulting in the need to take on additional resource. This is likely to be the most contentious part of the proposals, as it may significantly increase the cost of compliance for sole practitioners, who are already experiencing pressure on profitability.

What is not changing under the SRA proposals

The SRA has stated that it will not be making changes in the following key areas:

• Residual balances – it doesn’t intend to prescribe an exact timeframe for the return of client money. Instead, it will bolster the guidance around the existing requirement to return money ‘promptly’.
• Advance fees – firms can continue to exercise professional judgement as to whether to request advance payment of fees.

Future areas the SRA intends to review

The SRA still plans to review the current model of solicitors holding client money, and the thorny issue of interest earned on client money deposits, but no timeframe has yet been set.

If you’d like further advice and information on how the SRA proposals may affect your law firm, please contact Sheryl Davis.