Our article on the Solicitors Regulation Authority (SRA) decision to fine Kennedys Law LLP £18,000 plus costs for failing to prevent its staff from allowing its client account to be used as a banking facility is a useful reminder that Accounts Rules breaches are not just a small firm problem.
The SRA has made its stance clear that reputable, well-run firms should have no difficulty complying with the Accounts Rules. While this is true, compliance gaps tend to emerge not from a deliberate decision to cut corners, but from processes that have not kept pace with how the firm actually operates, or from a lack of understanding of the procedures that need to be followed.
Frequently Seen Accounts Rules Failures
Below, our compliance team outlines some of the most common Accounts Rules failures we encounter in practice.
- Using the Client Account as a Banking Facility
This was one of the core issues of the Kennedys case, and it remains one of the most frequently cited breaches in SRA published decisions.
Rule 14.5 (now Rule 3.3 in the 2019 standards) is clear: solicitors ‘must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.’ This rule exists because the client account is not the firm’s bank account. It holds clients’ money and must be treated and protected accordingly.
Typically, this goes wrong in property or commercial matters, where clients ask their solicitor to receive and hold funds or process payments that are not connected to any related legal transaction the firm is handling for the client. Often, it happens because of a misunderstanding about whether the payment is appropriate, but sometimes solicitors carry out the transaction because a long-standing client has asked for a favour. Either way, the firm is exposed.
If your fee earners are unclear about what constitutes a legitimate client account transaction, that is a training and supervision gap worth addressing now rather than after an SRA enquiry.
- Residual Balances Left Unaddressed
Residual client balances are one of the most common findings in file reviews and SRA audits. Holding clients’ money after the matter has closed is a breach of rule 2.5 and rule 3.3; there is no reason to still be holding this money, as you are no longer delivering a regulated service. If a balance cannot be returned to the client after reasonable efforts, there is a process for dealing with it, including payment to charity in appropriate circumstances. What firms cannot do is leave the balance indefinitely and hope nobody notices. Read our previous guide to residual client account balances and your firm’s regulatory obligations.
A pattern of unaddressed residential balances suggests that the firm does not have adequate systems in place for matter closure. That is exactly the kind of finding that invites further scrutiny from the regulator.
- Inadequate Reconciliations
The accounts rules require that firms reconcile client account balances at least every five weeks. In practice, we sometimes see firms doing reconciliations less frequently or lacking clear policies, systems, and procedures that provide sufficient overall control of client accounts. In guidance published by the SRA, the regulator suggests that firms operate a system that ensures they can produce:
- a full list of client ledger balances. Any debit balances should be separately listed, fully investigated and rectified promptly. The total of any debit balances cannot be deducted against the total of credit balances
- a full list of unpresented cheques
- a full list of outstanding lodgements
- formal statements reconciling the client account cash book balances, aggregate client ledger balances and the client bank accounts. If you identify any unresolved differences, they should be investigated and, where appropriate, corrective action taken
Read the full guidance here: sra.org.uk accurate client accounting records.
A reconciliation that is done badly is arguably worse than one that flags a discrepancy, because it creates a false sense of comfort. If your Compliance Officer for Finance and Administration (COFA) signs off on reconciliations that are not genuinely accurate, that is a compliance failure and poses a risk for your firm.
- Understanding What and When to Report to the COFA
There are various instances in which a regulatory duty to report a matter or error to the COFA arises. It is important to remember that the duty to report a matter to the COFA applies to everyone, and if an issue is noted, it is the individual’s responsibility to report this to the COFA as quickly as possible and not to leave it or ignore it. This could land both the individual and your COFA in difficulty.
Some of the core matters in which the COFA must be reported include any breaches of the SRA Accounts Rules, serious financial issues, mistakes in handling client money, overdrawn client accounts, and failure of reconciliations.
Deciding on a report to the COFA or, subsequently, to the SRA can be complex, and, importantly, getting things wrong can lead to consequences for failure to notify the SRA of a matter which they later decide was reportable.
What to Do If You are Concerned
Account Rules provide a framework to safeguard client funds and ensure they are not put at risk, and are an essential part of the SRA Standards and Regulations.
To ensure compliance with these rules, firms must establish appropriate systems and controls that align with the nature and volume of client transactions and the amount of client money held or received.
We work with firms and their COLPs and COFAs to assist them with the management of risk, compliance, and regulation through a range of training and outsourced support solutions. Our goal is to ensure the firms we work with have and retain a compliant structure, enabling the firms, their managers, and owners to focus on running their businesses and serving their clients.
Office and Accounts Manuals Drafting Service
We also provide an Office and Accounts Manuals Drafting Service to ensure compliance with the Accounts Rules, which includes:
- Discovery – interviewing the COFA and Accounts team to understand, in detail, the processes adopted by the firm to enable the manual to reflect how the firm operates.
- Drafting – drafting the manual on the basis of the information provided in the discovery process.
- Review – Review and draft to perfect the manual to ensure it meets the requirements of the firm.
- Finalisation – Issue of the manual for roll out in the firm.
- Updates – An optional extra is to provide an update service whereby we will reflect any required changes due to rule of guidance change by the SRA. In addition, we will provide an annual review, which enables us to also reflect any changes in the business that need to be reflected in the manual.
Additional support is available that can include:
- Training of the staff involved in the processes and affected by them.
- Ongoing maintenance to ensure the manual is up to date and reflective of the changing needs of the firm.
- Implementation of a bespoke performance management programme.
- Implementing of an employee handbook.
Learn more: Office and Accounts Manuals Drafting Service.
Reach Out to RACO
For more information on the Regulation & Compliance Office and how we can assist in accelerating your risk management, compliance and regulation, call us on: 0203 985 8550 or email us at: info@regulationandcomplianceoffice.co.uk
