The 14th of June saw the publication of the draft SRA Accounts Rules. Following a period of feedback prior to publication, the SRA backtracked on some of the more controversial elements.
The overall aim of the process is to simplify the system. The result is that the new draft is a mere 7 pages in length and contains only 12 rules.
This was the real villain of the piece during the consultation period. The initial proposal to amend the definition of client money, in a way that would exclude payments on account of costs and certain disbursements as being treated as client money, came in for a great deal of flack.
The new definition now includes money held by a firm in respect of fees and any unpaid disbursements if received before the delivery of a bill for them. This is the wording of the new rule:
Rule 4: Client money must be kept separate
4.1 You keep client money separate from money belonging to the authorised body.
4.2 You ensure that you allocate promptly any funds from mixed payments you receive to the correct client account or business account.
4.3 Where you are holding client money and some or all of that money will be used to pay your costs:
(a) you must give a bill of costs, or other written notification, to the client or the paying party;
(b) this must be done before you transfer any client money from a client account to make the payment; and
(c) any such payment must be for the specific sum identified in the bill of costs or other written notification, and covered by the amount held for the particular client or third party.
As the rule stands at present, there is an anomaly. On the surface, it appears to permit the transfer of monies from client account if a bill is sent to the client for “work to be undertaken”. In other words, a payment on account of costs.
Perhaps there is some room for further consideration of this by the SRA.
Another major change concerns billing prior to transferring costs from client to office account. This now applies to the firm’s costs rather than the firm’s fees. Crucially, the definition of “costs” refers to the firm’s profit costs and disbursements.
The definition of “fees” in the current rules is purely the profit cost element of the bill. Consequently, under the new rules, a firm cannot transfer funds held in a client bank account to cover disbursements paid out of office monies on behalf of the client, prior to giving a bill to the client.
In addition, there are changes to the way monies from the Legal Aid Agency are handled. Currently, monies received from the LAA can be paid into office account. This will not change under the new rules. However, there is now no obligation either to pay any unpaid disbursements or transfer the corresponding funds from office to client account.
SRA thinking seems to be that the simplification of the Legal Aid rules will not create problems. Removing the need for holding disbursements in a client account if:
does not imply that firms will be able to hold LAA payments in their office accounts indefinitely. If failure to make payment of case costs delays a client’s matter, the firms would be in breach of the SRA Code of Conduct.
The new draft rules really do not give a full picture. Whilst the rules are simpler and shorter, there is more to come.
The SRA has made it clear that they intend to publish supplementary guidance on the interpretation of the rules. The SRA identified this guidance as being likely to cover the following areas:
- Acting as a trustee and client money
- What is client money
- Name of client account
- Withdrawals to make payments to Charity
- Who can make withdrawals from client account?
- Residual balances due to a client
- Requirements to pay interest
- Accounting records and systems
- Accountant’s Reports
- Record keeping around operation of joint accounts
- Operation of a client’s own account
- Treatment of legal aid money/monies received relating to formal appointments (insolvency)
- Use of Third Party Managed Accounts
- Client account as a banking facility
- Waiver provisions
- Out of scope monies in an MDP
The upshot of this is likely to be a substantial amount of new guidance. As a result, this material will probably be treated as part and parcel of the rules themselves. Shorter and simpler? We remain to be convinced.
The new rules will not come into force before Autumn 2018. Prior to that, another consultation is on the cards and this is likely to form the basis for more amendments. You can see the full version of the draft by clicking this link: SRA Draft Accounts Rules.
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