In 2019, the Solicitors Regulation Authority (SRA) introduced significant revisions to the rules that law firms are required to follow when dealing with client money. These changes saw the introduction of a much shorter and simplified set of rules.
However, both for law firms and reporting accountants (RAs) like Saffery, the simplification in some areas has resulted in additional guidance to ensure that the interpretation and application of the rules is as the SRA anticipated.
Following feedback from stakeholders, the SRA is consulting on three proposed amendments to the rules, with further amendments related to other standards. The client money rule amendments are designed to provide greater clarity, formalise previous guidance, and address unintended knock-on consequences.
The first of the proposed amendments is to Rule 2: Client money. Currently, the wording of the rule does not prevent firms from sending a bill and subsequently making a client-to-office transfer for anticipated fees; this would result in the client’s money losing the protection that it would otherwise have had if held in a client account. The amendment specifies that bills and notifications of costs must be for costs that have already been incurred. This seems to be a sensible clarification, ensuring client money receives appropriate protections.
The second is to Rule 4: Client money must be kept separate, and the circumstances where a written notification of costs must be supplied. An additional part of the rule (4.4) has been proposed, which states that Rule 4.3 does not apply where you withdraw client money from a client account in full or partial reimbursement of money spent by you on behalf of the client, or the third party for whom the money is held. Practically, this relates to disbursements such as Land Registry searches or court fees, where the client is aware of the cost through the engagement they have entered into. In these instances, the firm would be able to transfer money from the client account to cover the costs without first delivering a specific notification of costs to the client.
Lastly is an amendment to Rule 10: Operation of a client’s own account, which proposes to relax the requirements around reconciling a client’s own account. Our experience has been that it is often impractical to apply the rule as it stands, an experience which has been mirrored by feedback received by the SRA. In light of this feedback, the SRA issued interim guidance on reasonable steps to take if the rule as it is stated was impractical – guidance which this proposed amendment formalises. The requirements would now be to obtain periodic statements, keep a record of transactions to be agreed against the statements (which must be signed off by the Compliance Officer for Finance and Administration (COFA) or a manager at least every 16 weeks) and keep a central register of clients’ own accounts – a change that will be welcomed by firms.
The consultation runs until 8 March. For further details and to view the amendments in full, visit the SRA website.
If you have any queries relating to the proposed amendments, please speak to your usual Saffery contact, or get in touch with Jamie Lane.