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Ethics Column: Thinking about numbers - changes to the SRA Accounts Rules
Ethics Column: Thinking about numbers - changes to the SRA Accounts Rules
Tracey Calvert
Oakalls Consultancy Limited
tcalvert@oakallsconsultancy.co.uk
THINKING ABOUT NUMBERS – CHANGES TO THE SRA ACCOUNTS RULES
I spend a lot of time thinking about numbers which may seem a slightly odd confession for a regulatory compliance adviser to make. However, the truth is that anyone involved in law firm compliance and risk management cannot avoid doing this and, for my part, I discuss financial viability issues and, of course, the need to keep client money safe and demonstrate compliance with the SRA Accounts Rules with clients on a regular basis.
Most firms hold client money, yet for many years my conversations were mainly with reporting accountants or with firm managers or accounts staff querying the findings of reporting accountants, particularly if these had led to a qualified report. Until very recently, this was often as far as interest in the topic extended.
One of the consequences of the launch of the SRA Handbook in 2011 was the need to recast the assumption that responsibilities in respect of client money could be limited. Entity-based regulation, and the concept that the firm’s continuing authorisation rests in the hands of the weakest link in the business, has been a game changer in many firms. Add to this risk-based regulation, and the SRA’s expectation that we will manage hot spots and fall in line with their opinions about risk priorities, and keeping client money safe and understanding the Accounts Rules becomes a firm wide issue.
The COFA leads the response by wearing the hat of an internal auditor. Many COFAs have seized the opportunity to assess their colleagues’ knowledge, review internal systems for suitability, and introduce training and reviews to ensure that both they and the firm are in a good position to demonstrate a proper response. What many COFAS are finding is that there is a surprising lack of technical knowledge within their businesses.
In many ways the SRA Accounts Rules 2011 should not be a surprise, or at least not to lawyers. The current rules are largely a ‘cut and paste’ job drawn from the Solicitors Accounts Rules 1998. In truth, these Rules are out of kilter with modern regulatory methods. The SRA acknowledged this almost as soon as the 2011 Handbook was launched but their position was justified on the basis that whilst flexibility and outcomes were good qualities in legal practice more generally, when it came to keeping client money safe and needing to ensue confidence and trust in the profession, more prescription was appropriate.
Despite these assertions, the Accounts Rules have in fact been undergoing a slow but very measured review to bring them into the twenty first century. We had alterations to the requirement to file accountants reports in 2014 and a different form of report in 2015, and in both years there have also been changes in respect of low risk firms designed to ensure a proportionate response on the part of the SRA. Finally, in June 2016, the biggest upheaval of all was announced with the SRA consultation on its Handbook, ‘Looking to the Future’, and this contains radical proposals for keeping client money safe.
We are told that the changes will not take effect until late 2017 or early 2018 so that what is currently expressed as the SRA’s preferred position may not reach the final cut. Nevertheless, it is prudent to start thinking about how any changes could have implications in practice and which of the systems and knowledge which were needed in 2011 will have to be reassessed.
The headline from the consultation paper has been a suggested change to the definition of client money. The regulator’s preference would be for the definition to exclude payments for legal fees and payments to third parties for which the law firm is liable. Wow – controversial! We have interesting times ahead.
If we will be required to treat money on accounts of costs and disbursements as non-client money, as the wording seems to suggest, then managers and COFAs have a number of navel-gazing questions to ask themselves in order to deliver a risk-based response to the change. For example: what happens if the firm closes and clients are owed money in respect of services which haven’t been delivered? What happens if the bank changes overdraft facilities? In fact, will there be an impact on the business relationship with the bank if the firm does not deposit so much money in a client account? What is the impact on the relationship with professional indemnity insurers? Will accounting software cope? Does this change the way in which firms work with their reporting accountants and the audit procedures which they must adopt? What are the VAT implications? What do clients need to know and will this require changed client care and terms of business documentation? What do staff need to know? Should risk registers and systems and controls be altered?
It is perhaps easier to understand the regulatory thinking about other suggested changes. For example, the widely publicised use of third party managed accounts may help a few firms avoid the costs associated with running a client account. It may also be a relief to see that the prescriptive timekeeping requirements are being replaced with more subjective requirements to deal with matters ‘promptly’. Also, the client accounting requirements have been reduced to 21 lines of text and this will perhaps be liberating in that flexibility and a firm-inspired response will be expected.
Given that some of the changes are radical, it seems unlikely that doing nothing is going to be an option. Whatever your views, all the changes will need to be considered and individual responses conceived. Now is the time to be thinking about numbers and start to plan to comply with future regulatory requirements.
Tracey Calvert
18 October 2016
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