As with many industries that are involved in the handling of client money, there are strict rules that must be followed
In particular, the Solicitors Accounts Rules govern authorised bodies providing regulated services in the legal profession and have been derived to protect client money and ensure that client funds are used only for the purposes for which they are given.
After a series of consultation phases over the past few years, the Solicitors Regulation Authority have now confirmed that new rules for solicitors on how to manage the client money they hold will come in to effect on 25th November 2019. The new rules allow greater autonomy and flexibility in the way an organisation conducts their business.
What you need to know
The old standards will be reduced from 52 rules to just 13 over six and a half pages.
The new rules will:
- remove all reference to the familiar 2 and 14 day rules in relation to the transfer of disbursements and costs and replace it with the word “promptly”;
- make changes to the transfer of disbursements and costs billed in advance;
- mean cease to hold audits will no longer be required when firms cease trading or change status, unless the SRA specifically request one.
An area of change
Transfer of fees and disbursements
The treatment of the transfer of fees and disbursements is having quite a significant change. At present, the rules allow firms to transfer money from the client account to reimburse themselves for amounts incurred on disbursements without first issuing a bill to the client.
The new rules state that firms will have to give a bill of costs, or other notification of costs incurred, to the client or paying party before they can transfer funds from the client account.
In addition, under the old rules, professional disbursements and “other” disbursements were treated and dealt with separately. Under the new rules all disbursements are treated the same.
Update – Third Party Managed Accounts (TPMA)
A TPMA is an account where a third party holds money on behalf of two or more transacting parties. For a law firm that would mean a third party would hold funds for you and your client. The new rules permit the use of TPMA’s, subject to this not resulting in you receiving or holding the client’s money and you taking reasonable steps to ensure the client is informed of and understands the terms and conditions.
What should you consider when adopting the new rules
Your business needs to ensure the rules are adopted and interpreted in a way that is most effective for you – ensure decision makers are involved in the changes. All relevant employees should then be made aware of the new procedures. Ensure that your accountant is up to date on the rules and changes are implemented efficiently i.e. consider how best to document transactions particularly in relation to disbursements. Consider the impact on cash flow if a timescale longer than the previous 14 day rules is adopted.