Clients’ Own Accounts – To Reconcile or not to Reconcile by Sponsor PKF Francis Clark

In this article Jason Mitchell considers one of the most controversial changes within the new SRA Accounts Rules 2019 coming into force on the 25th November 2019 relating to clients’ own bank accounts operated from within the law firm.

 

So what are the requirements of the new rule 10.1 surrounding client’s own bank accounts?

 

Under the new rules the definition of client money includes money held or received as a trustee or as the holder of a specified office or appointment, such as donee of a power of attorney, Court of Protection deputy or trustee of an occupational pension scheme.

 

Rule 10 .1 states the main body of the new accounts rules do not apply for clients’ own accounts except for rules 8.2 to 8.4 covering the accounting records and states:

 

8.2) You obtain, at least every five weeks, statements from banks, building societies and other financial institutions for all client accounts and business accounts held or operated by you.

 

8.3) You complete at least every five weeks, for all client accounts held or operated by you, a reconciliation of the bank or building society statement balance with the cash book balance and the client ledger total, a record of which must be signed off by the COFA or a manager of the firm. You should promptly investigate and resolve any differences shown by the reconciliation.

 

8.4) You keep readily accessible a central record of all bills or other written notifications of costs given by you.

 

So what is the issue with the changes?

 

You will notice from the above that rules 8.2 and 8.3 covers the three-way reconciliations requirements which firms and their COFAs should already be fully converse with as part of their duties. Within this process this will now require the inclusion of clients’ own bank accounts.

 

To be able to include the client’s own account within the three way client account reconciliation process, this would need to be fully integrated into the client accounting records / system. This is on the basis a detailed client ledger would be needed to provide the total ledger balance and the ability to produce the cashbook balance to follow the requirements of rule 8.3.

 

As a result to integrate these bank accounts areas which would make the process challenging would include:

  • It is often the case that several of the client’s personal transactions will be within the client’s bank account that are not initiated by the appointee in the practice that would need to be recorded.
  • As with a perceived weakness in compliance with the existing rules for such accounts, to capture such bank accounts within the accounting records relies on the appointee notifying the law firm’s finance teams.
  • There can be extended delays in obtaining bank statements, particularly without the ability to obtain online access for such accounts, to be able to meet the requirement to obtain these every 5 weeks.

Guidance from the SRA

 

The SRA have very recently published a guidance note on the above which can be found on their website.

 

Whilst the SRA requests that firms do fully reconcile clients’ own accounts, the guidance states that it is acknowledged for some firms this may not be practical and have stated they will not be in breach of the rules if they keep a:

  1. central register of the client own accounts that you operate,
  2. separate record of the transactions carried out by you or on your behalf in respect of the client’s own account, and
  3. record of your bills and other notification of costs relating to that client’s matter.

This information should be made available to your reporting accountant as and when required. We might also ask for this information.

 

Considering the SRA guidance this is fairly similar to the existing rules. However, note that point ii above is phrased differently to the current rule on this area and requires a separate record of transactions carried out by the appointee / firm to be maintained.

 

Given the SRA’s stance that they acknowledge clients’ own accounts are high risk and in the spirit of the rule changes, the view is it would not be sufficient just to retain the bank account statements  as a record of transactions as per the existing requirements.

 

The new rules in place take precedent but if it deemed unpractical to fully reconcile the client’s own account (with the reasons documented) , firms need to ensure a separate record of transactions internally initiated on the client’s own bank account within the practice are maintained.

 

There are possibly a number of ways a separate record of internally initiated transactions can be maintained and we would recommend firms seek guidance from their accountants on the best course of action to adopt.

 

Overall whilst there is some compromise within the rule changes in this area, as specified within the SRA guidance notice, law firms will need to take reasonable  steps to ensure that client money within clients own accounts is not at risk.

 

Contact

 

jasonmitchellformal-square-for-web You can contact Jason Mitchell on 01872 246585 or email:

 

Jason.mitchell@pkf-francisclark.co.uk

 

www.pkf-francisclark.co.uk

 

 

 

 

This publication is produced by Francis Clark LLP for information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of its issue), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.

 

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