SRA’s Accounts Rules (SAR) 2011 – What Fee-earners Need To Know

 In Practice Management

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ComplianceThe role of the COFA

Every firm must have appointed a Compliance Officer for Finance and Administration (COFA). The COFA has two key responsibilities:

  • to ensure compliance with the SRA’s Accounts Rules (SAR); and
  • to record and report failures to comply.

Most, if not all, SRA authorised firms will have accounting systems in place which are designed to ensure compliance with the SAR. These systems are tested annually as a result of the need for an accountant’s report. Those responsible for the day-to-day administration of client accounts are likely to be familiar with the SAR.

However, many of the compliance procedures are dependent upon correct and timely information from fee-earners (who may not be familiar with the detail in the SAR). Further, since COFAs must record all breaches of the SAR, an internal system of reporting breaches must be adopted and fee-earners must be able to recognise such breaches in order to report to the COFA.

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COFAs must therefore ensure that all principals and other members of staff are made aware of their own responsibilities regarding compliance with the SAR.

Client Money

Client money must be paid into a client account without delay except where the rules provide otherwise (rule 14.1). “Without delay” is defined in the SRA Handbook Glossary 2012 as meaning, in normal circumstances “either on the day of receipt or the next working day”. It is fair to say that on many occasions a firm has no control over the timing of depositing client money into client account if the deposit is made electronically. However, where cheques are received in the post or handed over at client meetings, fee-earners must be able to recognise whether the sum involved includes client money and if so, arrange for its prompt banking in accordance with rule 14.1.

Further, rule 14.2 provides that only client money can be paid into client account (with limited exceptions, e.g. allowing office money to be paid into client account in respect of costs and sums necessary to remedy breaches). Fee-earners may need to recognise office money and ensure that such sums are not paid into client account.

Rule 12.1 provides that all money (other than out-of-scope money) held or received in the course of practice will be client money or office money.

Client money is defined as money held or received for a client and all money which is not office money. Consequently it is not necessary for a firm to be in a position to identify a named client or matter – if money is not office money it must be treated as client money.

Rule 12.2 states that client money includes money held or received:

  • as trustee;
  • as agent/stakeholder;
  • for payment of unpaid professional disbursements (e.g. counsel’s fees, or the fees of a professional or other agent or expert instructed by the solicitor);
  • for payment of stamp duty land tax, L.R. registration fees, court fees;
  • as a payment  on account of costs;
  • as a financial benefit paid in respect of a client (unless client has given prior authority for its retention in accordance with Outcome 1.15 of the Code of Conduct); and
  • jointly with another person outside the firm.

Money held to the sender’s order is also client money.

Office money is defined as money belonging to the solicitor or practice including money held in connection with the practice and interest on general client account.

Rule 12.7 provides that office money includes payments received in respect of:

  • Fees due to the practice against a bill or other written notification;
  • Disbursements already paid by the practice;
  • Disbursements incurred but not yet paid by the practice (excluding professional disbursements); and
  • Money paid as an agreed fee.

Some of these require further comment.

Disbursements

A sum paid to the firm for payment of an unpaid professional disbursement or unpaid stamp duty land tax etc. is client money. However, where a firm incurs a liability to pay a third party on behalf of a client (other than in respect of a professional disbursement) and a sum is received (e.g. from the client) before the firm pays the third party, the sum received is office money. Assume a bill of costs shows two disbursements noted as “unpaid” (s. 67 Solicitors Act 1974 requires unpaid disbursements to be described in the bill as not then paid). The first represents unpaid counsel’s fees covering an opinion on tax law (a professional disbursement); the second an unpaid courier’s costs (where the solicitor has ordered the service and has thus incurred a liability to the courier). On payment of the bill (assuming the disbursements both remain unpaid) the counsel’s fees will be client money; the courier’s costs will be office money.

Agreed fees

Sums on account of costs will be client money; sums paid as an agreed fee will be office money.  Agreed fees must be paid into office account and must be evidenced in writing. They cannot be dependent upon the transaction completing (Rule 17.5). Consequently not all “fixed fees” will be agreed fees. For example, a solicitor agrees with a client to draft a Will for a fixed fee of £500 + VAT and requires the client to make an upfront payment. Assuming that the full sum will not be payable if the client chooses to terminate the instructions before the work is done (as is the client’s right), the upfront payment will be client money (a sum on account of costs) not office money in the form of an agreed fee.

Acting for a principal

Money held or received on behalf of a principal when the firm is acting on a personal transaction for the principal (e.g. conveyancing) is office money (rule 12.8). However, “principal” for these purposes is defined as a sole practitioner or a partner in a partnership. The definition also includes a Limited Liability Partnership (LLP) or Limited Company but does not include a member of a LLP or a director or shareholder of a company. If the firm acts for a principal and a lender, a principal and someone else jointly (e.g. a spouse) or if the firm acts for an employee, money held or received will be client money.

Use of client account

Rule 14.5 states that banking facilities must not be provided through client account – banking activities must be in respect of instructions relating to an underlying transaction or to a service forming part of your normal regulated activities – see Patel v Solicitors Regulation Authority [2012] EWHC 3373.

Client money held outside client account

Client’s money may be held outside a client account where:

  • a member of a firm acts as a liquidator, a trustee in bankruptcy, a Court of Protection Deputy or  a trustee of an occupational pension scheme (r 8);
  • money is held or received jointly with another (r.9) e.g. where a bank account is opened in the joint names of a partner trustee and an external co-trustee;
  • the client instructs to that effect (r. 15) e.g. where an external trustee instructs the firm to hold money in an off-shore account (which by definition cannot be a client account); or
  • the sum is withheld from client account in accordance with trustees’ powers (r. 16).

Where rules 8, 9, 15, or 16 apply, a firm must retain all non client account statements from banks, building societies and other financial institutions for 6 years and must hold these together centrally or maintain a central register of all such accounts. Further, where rules 15 and 16 apply full SAR compliance is required including monthly reconciliation.

In many cases, fee-earners may prefer to hold such statements on the client file for easy access, in which case a central record must be maintained. If the accounts are opened by the firm’s cashiers, they will be aware of the compliance requirements and can keep the necessary central records. If fee-earners open the accounts themselves (or, in the case of a joint account, the account is opened by the joint account holder – not the firm) fee-earners will need to notify the cashiers to enable appropriate records to be maintained.

Operation of client’s own account

Under rule 10, where, in the course of practice, a client’s own account is operated by signature of a member of the firm (e.g. under a power of attorney or other bank mandate) the firm must retain all statements etc. for 6 years and must hold these together centrally or maintain a central register of all such accounts. Again, if a central register is required, fee-earners will need to notify cashiers of any circumstances giving rise to this obligation. Note also that rule 32 requires the delivery of an accountant’s report covering all those who have held or received client money during the accounting period. This requirement generally will exclude associates and other employees. However an associate or other employee who operates a client’s own account will be required to deliver an accountant’s report.

Withdrawal from client account

A withdrawal from a client account may be made only after a specific authority in respect of that withdrawal has been signed by an appropriate person or persons in accordance with the firm’s procedures for signing on client account. The authority for withdrawal may be signed electronically, subject to appropriate safeguards and controls.

Firms must put in place appropriate systems and procedures governing withdrawals from client account, including who should be permitted by the firm to sign on client account.

The SRA Guidelines for Accounting Procedures and Systems (Appendix 3 SAR) states:

“Persons nominated for the purpose of authorising internal payment vouchers should, for each payment, ensure that there is supporting evidence showing clearly the reason for payment. Similarly persons signing cheques and authorising transfers should ensure that there is a suitable voucher or other supporting evidence to support the payment.”

Thus, three conditions must be met before client money is withdrawn from client account:

1.   the withdrawal must not exceed money held for client;

2.   the reason for withdrawal must be one listed in rule 20; and

3.   there must be a signed authority for the withdrawal.

The reasons for withdrawal are listed in rule 20 and include: proper payment to/on behalf of clients/trust; proper payment in full/partial reimbursement of money spent by solicitor; transfer to another client account; and withdrawal on client’s instructions.

In the light of the above, a cheque on client account, signed by a partner who is not involved in the matter and where no supporting documentation or information has been provided would not be authority in accordance with the SAR.

Whilst in the majority of cases, the prior written authority of a client for withdrawal is not necessary, in one situation it is mandatory. Rule 27 provides that no sum in respect of private loan from one client to another can be paid from funds held for the lender either:

  • by payment from one client account to another;
  • by paper transfer; or
  • to the borrower direct,

without the prior written authority of both clients. Acting for both parties on a private loan might generally be in breach of the conflict rules. However assume a firm acts for trustees and holds money for the trust fund in client account. The firm is instructed by a beneficiary of the trust on a personal conveyancing transaction and the trustees agree to advance the deposit by way of a bridging loan from the trust funds. In this situation the firm would need the prior written consent of the beneficiary and all the trustees before withdrawing money from client account.

Costs

On receipt of money in full/partial payment for costs and disbursements three options are generally available for non-legal aid money. Either the sum must be identified as client or office money or a mixture of both and dealt with accordingly. If this option is adopted it must be carried out without delay (i.e. day of receipt or next working day). If the only client money consists of unpaid professional disbursements incurred by the firm (e.g. counsel’s fees) as an alternative to paying the money into client account, the sum can be paid into office account provided the unpaid disbursement is either paid or is transferred into client account by the end of the second working day following its receipt. The third option is to pay the sum into client account provided any office money is transferred out of client account within 14 days of receipt (rule 17).

Note that the safest course open to firms, who wish to provide clients with details of their bank account to allow for the electronic payment of costs, is to provide clients with client account details. If office account details are provided and a client by mistake overpays, a breach will have occurred and will have to be recorded by the COFA.

Where payment of fees is properly required from money held in client account, a bill of costs/other written notification must first be sent. Once this has been done, the money earmarked for costs becomes office money and must be transferred out of client account within 14 days. “Properly” implies that the work has been done either at the end of a matter or at an interim stage (although in a conveyancing transaction it is “proper” to transfer costs as soon as the land transfer has been completed).

“Earmarked” means earmarked by the firm – not the by the client, although in the absence of an express indication, the firm will be deemed to have earmarked appropriate sums in client account for the payment of costs. Fee-earners must be alert to this. If there is money in client account for costs and payment of costs is proper (e.g. an interim bill), delivery of a bill will trigger the 14 day period unless the fee-earner on delivering the bill (or otherwise) makes it clear that the sum in client account has not been earmarked for the payment of this bill. Client approval is not required. If approval is necessary before transfer, the notes to the SAR suggest that the amount to be taken will need to be agreed with the client before issuing the bill to avoid the possibility of failing to meet the 14 day time limit.

Conclusion of retainer

At the conclusion of the retainer, client money must be returned to the client promptly, as soon as there is no longer any proper reason to retain it. Where there is a proper reason to retain it the client must be promptly informed in writing of the amount of any client money retained and the reason for the retention. This information must be repeated at least every 12 months (rule 14). Since it is the fee-earner who will know when the matter has concluded it will be their responsibility to ensure that the rule is followed. In both cases (i.e. where there is or is not a reason for retention) the rule must be complied with “promptly”. Consequently if client money is held at the end of a retainer one or other of the requirements must be followed.

Residual balances of £50 or less can be withdrawn from client account if the conditions in rule 20 are satisfied. These are that the owner is identified; that adequate attempts to return the sum to the rightful owner are taken, or the cost of doing so is excessive in relation to the amount; that any sum is paid to a charity; and that proper records under rule 29 are kept. This provision should not be treated as a de minimis provision. If the client contact details are known, steps must be taken to return the sum.

If the client’s whereabouts are unknown and residual balances cannot be dealt with under rule 20 (e.g. the sum is in excess of £50), an application can be made to the SRA for consent to withdraw the money. Conditions can be imposed that the money should be paid to a charity which gives an indemnity.

Conclusion

Fee-earners cannot assume that the firm’s responsibility arising from the SAR rests solely with the COFA and cashiers. All partners and employees are subject to the SAR (and can be penalised for their own acts and omissions). It is part of the COFA’s role to ensure all members of staff understand their duties regarding the protection of client funds.

Peter Camp is the General Editor of the Legal Compliance Bulletin (published six times a year by the Law Society) and author of Solicitors and the Accounts Rules (3rd ed. The Law Society).

This article is based upon an article which first appeared in the Legal Compliance Bulletin and is reproduced with consent.

 

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