Solicitor's Accounts Flashcards
(32 cards)
Who the SRA Accounts Rules apply to
Part 1: General
Application section
1.1 These rules apply to authorised bodies, their managers and employees and references to “you” in these rules should be read accordingly.
1.2 The authorised body’s managers are jointly and severally responsible for compliance by the authorised body, its managers and employees with these rules.
- The SRA Accounts Rules state that they apply to authorised bodies, their managers and employees.
- Authorised bodies and managers are defined in the SRA Glossary. Authorised bodies are bodies authorised by the SRA to practise as either bodies licensed by the SRA or bodies recognised by the SRA. Managers are: the sole principal in a recognised sole practice; members of a LLP; directors of a company; partners in a partnership; or in relation to any other body, a member of its governing body.
Who is responsible for compliance?
Part 1: General
Application section
1.1 These rules apply to authorised bodies, their managers and employees and references to “you” in these rules should be read accordingly.
1.2 The authorised body’s managers are jointly and severally responsible for compliance by the authorised body, its managers and employees with these rules.
- The SRA Accounts Rules state that the authorised body’s managers are jointly and severally (ie together and separately so they share responsibility equally so that if one manager is unable to share in the responsibility, the others become responsible for their share) responsible for compliance with the rules by the authorised body, its managers and its employees.
- From the SRA Glossary, Managers are: the sole principal in a recognised sole practice; members of a LLP; directors of a company; partners in a partnership; and in relation to any other body, a member of its governing body.
Accountants’ reports
If you have, at any time during an accounting period, held or received client money, or operated a joint account or a client’s own account as signatory, you must:
(a) obtain an accountant’s report for that accounting period within six months of the end of the period; and
(b) deliver it to the SRA within six months of the end of the accounting period if the accountant’s report is qualified to show a failure to comply with these rules, such that money belonging to clients or third parties is, or has been, or is likely to be placed, at risk.
Requirement to obtain and deliver an accountant’s report
Rule 12.1 requires authorised bodies that hold or receive client money (or operate a joint account or a client’s own account as signatory) to obtain an accountant’s report within six months of the end of the accounting period to which the report relates (Rule 12.1(a)).
NB It follows from Rule 12.1(a) that if the authorised body has NOT held client money for the accounting period, then it will not be required to obtain an accountant’s report.
The accountants’ report should only be delivered to the SRA if it is qualified. That means (Rule 12.1(b)) if it shows a failure to comply with the SRA Accounts Rules so that the client’s (or third party’s) money is/has been/is likely to be at risk.
NB It follows from Rule 12.1(b) that if the accountant’s report is NOT qualified, then it does not need to be delivered to the SRA.
Qualified accountant’s report
SRA Guidance: ‘Planning for and completing an accountant’s report’ states that the SRA ‘only expect reports to be qualified where there has been a significant breach of the Accounts Rules, such that money belonging to clients or third partiesis, has been or may be placed at risk.’
It also states that ‘breaches arising from administrative errors are not likely to be significant, but still could be if they are persistent, derive from a lack of controls or breakdown of existing controls, and have put client money at risk.’
The guidance says that the SRA ‘recognise that minor breaches of the Accounts Rules do occur in many firms and we are not expecting all identified breaches to be notified to us in the form of a qualified report.’
The SRA Guidance ‘Planning for and completing an accountant’s report’ gives someillustrative factors that the SRA would expect would lead to a report being qualified including (amongst others):
- ‘a significant and/or unreplaced shortfall (including client debit balances or business credit balances)on client account…unless caused by bank error and rectified promptly’;
- ‘Actual or suspected fraud or dishonesty by the managers or employees of the firm (that may impact upon the safety of money belonging to clients or third parties)’;
- ‘Accounting records not available …**.or bank accounts/ledgers failing to include reference to a client’;
- ‘Client account bank reconciliations not being carried out’; and
- ‘The client account …improperly used as a banking facility’.
SRA requires an accountant’s report
Under Rule 12.4, the SRA can require an authorised body to obtain or deliver an accountant’s report to the SRA on reasonable notice if the authorised body has ceased to operate as an authorised body and to hold or operate a client account (ie a final report) and the SRA can also require an authorised body to obtain or deliver an accountant’s report to the SRA if the SRA considers it is in the public interest to do so.
Accountants’ reports
2 You are not required to obtain an accountant’s report if:
(a) all of the client money held or received during an accounting period is money received from the Legal Aid Agency; or
(b) in the accounting period, the statement or passbook balance of client money you have held or received does not exceed:
i. an average of £10,000; and
ii. a maximum of £250,000,
or the equivalent in foreign currency.
12.3 In rule 12.2 above a ‘statement or passbook balance’ is the total balance of:
(a) all client accounts held or operated by you; and
(b) any joint accounts and clients’ own accounts operated by you,
as shown by the statements obtained under rule 8.2.
[NB Rule 8.2 is the obligation to obtain, at least every five weeks, bank/building society statements for all of the authorised body’s client accounts and business accounts. These are required to complete the client account reconciliations required by Rule 8.3].
exemptions from requirement to obtain an accountant’s report
If, under Rule 12.1, the authorised body is required to obtain an accountant’s report, it might still fall under one of the two exemptions in Rule 12.2 and therefore not have to obtain an accountant’s report after all.
1) Where all of an authorised body’s client money held or received during an accounting period is money from the Legal Aid Agency, it will not be required to obtain an accountant’s report (Rule 12.2(a)) under Rule 12.1 (it may still be required to provide one under Rule 12.4 ie where ceasing to operate as an authorised body and operate a client account or where the SRA consider it in the public interest).
2) If, during the accounting period, the average balance on its client account(s) does not exceed £10,000 AND the maximum balance does not exceed £250,000, the authorised body is not required to obtain an accountant’s report (Rule 12.2(b)) under Rule 12.1 (it may still be required to provide one under Rule 12.4).
NB these exemptions only apply to that accounting period (usually a year). It may be that the following accounting period, the authorised body does not fall within the exemptions and so needs to obtain an accountant’s report.
Accountants’ reports
These rules set out the authorised body’s obligations with regard to the form of the accountant’s report:
The accountant needs to be both a member of a chartered accountancy body AND work for or be a registered auditor.
The report must be in the form prescribed by the SRA.
12.5 You ensure that any report obtained under this rule is prepared and signed by an accountant who is a member of one of the chartered accountancy bodies AND who is, or works for, a registered auditor.
……
12.9 The accountant must complete and sign their report in the prescribed form [NB the SRA Glossary defines this as the form prescribed by the SRA from time to time].
Rules 12.6, 12.7 and 12.8
Rules 12.6 and 12.7 set out the rights of the SRA to disqualify an accountant from preparing a report and to specify matters which must be in the terms of engagement entered into between the authorised body and the accountant.
12.6 The SRA may disqualify an accountant from preparing a report for the purposes of this rule if:
(a) the accountant has been found guilty by their professional body of professional misconduct or equivalent; or
(b) the SRAis satisfied that the accountant has failed to exercise due care and skill in the preparation of a report under these rules.
12.7 The SRA may specify from time to time matters that you must ensure are incorporated into the terms on which an accountant is engaged.
Accountants’ reports - Rules 12.6, 12.7 and 12.8
Rule 12.8 sets out the authorised body’s obligation to provide the accountant with account details and all other information the accountant requires.
12.8 You must provide to an accountant preparing a report under these rules:
(a) details of all accounts held or operated by you in connection with your practice at any bank, building society or other financial institution at any time during the accounting period to which the report relates; and
(b) all other information and documentation that the accountant requires to enable completion of their report.
Storage and retention of accounting records –Rule 13.1
13.1 You must store all accounting records securely and retain these for at least six years.
Accounting records, in the definition in the SRA Glossary, include bank and building society statements, the accountants’ reports (whether qualified or not) any client’s written instructions to hold client money other than in accordance with the SRA Accounts Rules, records relating to third party managed accounts and any other records or documents necessary to show compliance with the SRA Accounts Rules.
Rule 9.1
‘9.1 If, when acting in a client’s matter, you hold or receive money jointly with the client or a third party, Part 2 of these rules does not apply save for:
(a) rule 8.2 - statements from banks, building societies and other financial institutions;
(b) rule 8.4 - bills and notifications of costs.’
SRA Guidance on joint accounts -1/2
The SRA’s Guidance ‘Joint accounts and record keeping’ explains that a joint account is not a client account but money held in a joint account is still client money.
It explains that a joint account allows the solicitor/ authorised body to operate and manage the account and money in it along with another person. Examples of that other person who operates the joint account with the solicitor/authorised body are: the client; another law firm; a third party.
The SRA Guidance gives, as an example of where a joint account might be operated, the circumstance of a firm’s solicitor being named as a joint executor with a lay person on the administration of an estate.
SRA Guidance on joint accounts – 2/2
The SRA’s Guidance also makes clear the solicitor’s/authorised body’s obligation with regard to the money in the joint account is to always make sure that you safeguard money and assets entrusted to you by clients and others (paragraph 4.2 of the SRA Code of Conduct for Solicitors and paragraph 5.2 of the SRA Code for Firms).
The Guidance explains that, as those named on the joint account will have equal access to it, the risks to a client’s money could be higher than if the money was kept in your firm’s client account with processes and safeguards to authorise withdrawals.
It suggests that you consider in each case the risks to the client’s money and action you could take to mitigate against those risks eg making sure the joint account has a joint signature mandate, if possible.
Which SRA Accounts Rules apply to a joint account? – 1/2
As Rule 9.1 makes clear, Part 2 (the largest part of the Accounts Rules covering client money and client accounts) does not apply to joint accounts apart from Rules 8.2 and 8.4 about bank statements and bills. Also, Rules 10.1. and 11.1 in Part 3 are not relevant to joint accounts as they deal with a client’s own account and third party managed accounts.
The SRA Accounts Rules that do apply to joint accounts are:
Rule 1 - who the Accounts Rules apply to
Rule 8.2 –obtain, at least every five weeks, statements from banks, building societies etc for all client accounts and business accounts [ie so this also includes joint accounts because of Rule 9.1]
Rule 8.4 – to keep readily accessible a central record of all bills or other written notifications of costs given by you
Which SRA Accounts Rules apply to a joint account? – 2/2
The reason for Rules 8.2 and 8.4 applying and having to obtain bank statements for the joint account and keep a record of bills sent is that if the solicitor/authorised body is required to obtain an accountant’s report (Rule 12.1 and the 12.2 exceptions), the accountant may need access to the bank statements and bills for the joint account to make sure there are no issues of concern. Rule 12.1 clearly states that the requirement to obtain an accountant’s report applies if you have operated a joint account (although the exceptions for Legal Aid money and for average and maximum balances in Rule 12.2 may apply).
The bills and bank statements for the joint account are the accounting records for the joint account and need to be kept securely and retained for at least six years – Rule 13.1.
So Rules 12 and 13 (ie Part 4 of the Rules) on accountant’s reports and accounting records also apply to joint accounts.
Operation of a client’s own account
‘10.1 If, in the course of practice, you operate a client’s own account as signatory, Part 2 of these rules does not apply save for:
(a) rule 8.2 - statements from banks, building societies and other financial institutions;
(b) rule 8.3 – reconciliations;
(c) rule 8.4 - bills and notifications of costs.’
Operation of a client’s own account – 1/2
The operation of a client’s own account as signatory is very similar to the operation of a joint account, except that Rule 8.3 on reconciliations applies as well as Rules 8.2 and 8.4 (but not the rest of the Part 2 rules on client money and client accounts).
Rule 8.3 - requires you to complete, at least every five weeks, a reconciliation of the bank/building society statements balance for the account with the cash book balance and client ledger total so that you can promptly investigate and resolve any differences shown by the reconciliation.
NB There is no SRA Guidance on operation of a client’s own account or explanation of why Rule 8.3 applies to it but not to the operation of a joint account.
Operation of a client’s own account – 2/2
The reason for Rules 8.2 - 8.4 applying and having to obtain bank statements, carry out reconciliations and keep a record of bills sent is that if the solicitor/authorised body is required to obtain an accountant’s report (Rule 12.1 and the 12.2 exceptions), the accountant may need access to these to make sure there are no issues of concern. Rule 12.1 clearly states that the requirement to obtain an accountant’s report applies if you have operated a client’s own account as signatory (although the exceptions for Legal Aid money and for average and maximum balances in Rule 12.2 may apply).
The bank statements, reconciliations and bills for the client’s own account as signatory are the accounting records for it and need to be kept securely and retained for at least six years – Rule 13.1.
So Rules 12 and 13 on accountant’s reports and accounting records also apply when you’re a signatory on a client’s own account.
Third party managed accounts –Rule 11.1
‘11.1 You may enter into arrangements with a client to use a third party managed account (‘TPMA’) for the purpose of receiving payments from or on behalf of, or making payments to or on behalf of, the client in respect of regulated services delivered by you to the client, only if:
(a) use of the account does not result in you receiving or holding the client’s money; and
(b) you take reasonable steps to ensure, before accepting instructions, that the client is informed of and understands:
The terms of the contractual arrangements relating to the use of the TPMA, and in particular how any fees for use of the TPMA will be paid and who will bear them; and
The client’s right to terminate the agreement and dispute payment requests made by you.’
Third party managed accounts –Rule 11.2
11.2 You obtain regular statements from the provider of the TPMA and ensure that these accurately reflect all transactions on the account.
The SRA Glossary defines a TPMA as an account held at a bank/ building society in the name of a third party which is an authorised payment institution (or similar – the Glossary sets out the alternatives) regulated by the FCA, in which monies are owned beneficially by the third party, and which is operated upon terms agreed between the third party, you and your client as an escrow payment service.
NB Rule 12.1 on obtaining an accountant’s report does not apply to third party managed accounts. However,Rule 13.1, on storing accounting records securely for at least six years, does as ‘accounting records’ is defined in the SRA Glossary to include records and documents, including electronic records, relating to third party managed accounts.
SRA Guidance on third party managed accounts (‘TPMA’) – 1/4
TheSRA’s Guidance ‘Third party managed accounts’ explains that SRA authorised bodies can use a TPMA as an alternative to a client account or alongside a client account.
It explains that money held in a TPMA does not fall under the definition of client money in the SRA Accounts Rules as it is not held or received by you (the authorised body) (see Rule 11.1(a)). Therefore, it does not have to be held in accordance with the SRA Accounts Rules relating to the holding of client money.
Rule 11 does however apply to the authorised body using a TPMA and the authorised body must comply with the requirements set out in it.
SRA Guidance on TPMA – 2/4
To comply with Rule 11:
- The authorised body has to ensure use of the TPMA does not result in them receiving or holding the client’s money (Rule 11.1(a)).
- The authorised body must take reasonable steps to ensure the client is informed of and understands:
Ø their rights and obligations and what use of the TPMA means in their case, in particular any charges or fees they are liable to pay (Rule 11.1(b)(i)); and
Ø their right to terminate the agreement and dispute payment requests you make (Rule 11.1(b)(ii).
- The authorised body must obtain regular statements and ensure these reflect transactions on the account correctly (Rule 11.2).
SRA Guidance on TPMA – 3/4
The Guidance makes clear that the obligation to protect client money and assets (paragraph 4.2 SRA Code of Conduct for Solicitors and paragraph 5.2 of the SRA Code of Conduct for Firms) remains relevant to funds held in a TPMA. To meet that obligation and Principle 7 (the obligation to act in the best interests of each client), the Guidance says you need to make sure the decision to use a TPMA, and the one used, is appropriate in each case.
SRA Guidance on TPMA – 4/4
The TPMA must be (these requirements are in the SRA Glossary definition of TPMA and are also set out in the Guidance):
- regulated by the FCA (Financial Conduct Authority);
- an authorised payment institution/ EEA authorised payment institution/ small payment institution which has adopted voluntary safeguarding arrangements to the same level as an authorised payment institution;
- an account at a bank/ building society;
- operated as an escrow payment service (the third party receives and disburses money on your and your client’s behalf); and
- the monies in the TPMA must be owned beneficially by the third party.
The SRA and TPMA
The Guidance explains that an authorised body does not need the SRA’s permission to use a TPMA but that the SRA expect to be notified if a TPMA is being used (by filling out a TPMA form). If more than one TPMA provider is used, the SRA expect to be notified of all the providers used and to be informed of any switches between providers or if the authorised body stops using a TPMA provider so they can update their records.
The client account - Rule 3
Rule 3.1 of the SRA Accounts Rules states:
3.1 You only maintain a client account at a branch (or the head office) of a bank or a building society in England and Wales.
3.2 You ensure that the name of any client account includes:
(a) the name of the authorised body; and
(b) the word ‘client’ to distinguish it from any other type of account held or operated by the authorised body.
3.3 You must not use aclient account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawals from a client account must be in respect of the delivery by you of regulated services.
NB ‘regulated services’ are defined in the SRA Glossary as the legal and other professional services you provide that are regulated by the SRA.
- The authorised body’s client bank account will therefore have to have the name of the authorised body in it and the word ‘client’ so e.g. a law firm called Northfields LPP might have their client bank account called ‘Northfields LLP client account’.
- Northfields LLP client account is a bank account belonging to that law firm, in which it puts its clients’ money in, it is NOT a bank account belonging to the client.
NB ‘regulated services’ are defined in the SRA Glossary as the legal and other professional services you provide that are regulated by the SRA.
Importantly, any payments into (as well as withdrawals from or transfers of money out of) client account must be made in respect of the delivery of your legal services to the client.
Payments into the client account –Rule 2.3
Rule 2.3 of the SRA Accounts Rules states (with a few limited exceptions) that you ensure that client money is paid promptly into a client account.
- There is no definition of ‘promptly’ in the SRA Accounts Rules.
- Rule 2.3 makes it clear that when you receive money which you identify as client money, you must pay it into the authorised body’s client bank account promptly.
- There are three exceptions set out at Rule 2.3 (a)-(c) which we will now consider.
Rule 2.3 exceptions
The three exceptions to Rule 2.3 that you ensure client money is paid promptly into a client account are:
a) money held as a trustee or as the holder of a specified office or appointment, such as a donee of a power of attorney, Court of Protection deputy or trustee of an occupational pension scheme does not have to be paid into a client account if doing so would conflict with your obligations under rules or regulations relating to your specified office or appointment;
b) if the client money represents payments from the Legal Aid Agency for your costs (costs meaning your ‘fees and disbursements’) (‘fees’ meaning your own charges or profit costs including any VAT element) it does not have to be paid into the client account; and
c) If you agree in the individual circumstances an alternative arrangement in writing with the client, or third party, for whom the money is held not to hold the money in your client account.
Rule 2.3 exceptions
There are no Rules or guidance setting out how you should deal with the money at Rule 2.3 (a) – (c).
However, for (a) the rules and regulations relating to your office or appointment need to be looked at to see how they dictate the money should be held and those rules complied with. This will almost certainly require the authorised body to set up a separate client account for the relevant money so it is kept separate not only from non-client money but also money belonging to other clients of the firm.
The payments referred to in relation to (b) represent the law firm’s costs so it is logical for those not to be treated as client money.
The money under (c) will have to be held in accordance with the alternative agreement made with the client or third party. A record will need to be kept of what the terms of that agreement are.
Rule 2.2
Rule 2.2 of the SRA Accounts Rules is a way of holding client money when the authorised body does not have a client account (and so cannot comply with Rule 2.3 to promptly pay the client money into the client account).
Rule 2.2 applies where:
· the only client money the authorised body holds/receives is in respect of their fees and any unpaid disbursements, prior to delivery of a bill for the same, and
· any money held for disbursements relates to costs or expenses incurred by the authorised body on behalf of the client and for which the authorised body is liable, and
· the authorised body does not maintain a client account.
Under Rule 2.2, the authorised body is not required to hold this client money in a client account provided they have informed their client in advance of where and how the money will be held.
SRA Guidance on Rule 2.2
The SRA Guidance‘Do I need to operate a client account?’ further explains Rule 2.2 as applying if:
· the client money is only advance payments for fees and unpaid disbursements incurred by you on behalf of your client and for which you are liable, e.g., counsel or expert fees but not, e.g., disbursements for which your client is liable (such as stamp duty land tax), and
· your client has been properly advised and is given sufficient information about where their money will be held. This includes explaining that their money will not be held on account for them or specifically ring fenced (e.g. if the firm becomes insolvent), as the money may be held and used as part of the firm’s own money in their business account. The client can then make an informed decision about whether they wish for their money to be held outside of a client account or consider other alternatives e.g. a third party managed account.
SRA Guidance on Rule 2.2
The SRA Guidance ‘Do I need to operate a client account?’ alsohelps with the question of SRA Accounts Rules which are still relevant if the authorised body is relying on Rule 2.2 to hold client money but not in a client account.
Rule 2.5 applies – client money needs to be returned promptly as soon as there is no longer any proper reason to hold the money. For example, if the advance payments from a client exceed the final fees that the authorised body sets out in their bill to the client once work is completed, the balance left needs to be returned promptly to the client.
Rule 4.3(a) applies – the authorised body must have given the client a bill or other written notification of costs (if some of the client money will be used to pay their costs).
Rule 8.1(a) applies – the authorised body should keep accurate records showing receipts and payments of client money in a client ledger. The purpose of a client ledger is to record any client money wherever it is held, and it can be used even if the firm does not have a client account.
Rule 2.2 – SRA Accounts Rules which do not apply
Rule 2.2 does however state that various of the other SRA Accounts Rules do NOT apply to client money held outside a client account, in accordance with Rule 2.2.
The obligation to pay client money promptly into a client account (Rule 2.3) does not apply (as there is no client account). The client money also doesn’t have to be available on demand (Rule 2.4).
The client money doesn’t have to be kept separate from money belonging to the authorised body (Rule 4.1), so client money held under Rule 2.2 can be held in the authorised body’s business account. Rule 7 on accounting to the client for a fair sum of interest on client money which the authorised body holds also does not apply.
Whilst a client ledger does need to be kept showing receipts and payments of the client money held under Rule 2.2, other parts of Rule 8.1 do not apply so there does not need to be a list of the balances shown by the client ledger accounts nor does there need to be a cash book showing transactions through the client account (as there is no client account).
The requirement to obtain and deliver an accountant’s report (Rule 12) does not apply if the authorised body is holding client money in accordance with Rule 2.2.
Rule 6.1
Rule 6.1 of the SRA Accounts Rules states that you must correct any breaches of the rules promptly upon discovery. Any money improperly withheld or withdrawn from a client account must be immediately paid into the account or replaced as appropriate.
- So, if money is withheld improperly (ie in breach of the SRA Accounts Rules) and not paid into a client account as it should be, Rule 6.1 states that the money must be immediately paid into the client account.
