The possible impact of the SRA’s proposed Account Rules changes has been subject to scrutiny.
Part of their aim to modernise legal sector regulation, the SRA revised the Accounts Rules last year following a consultation. The results of this consultation saw a drastic reduction in the rules proposed, with the total falling from 52 to 13. This decline neatly illustrates one of the SRA’s key aims in regard to the update; largely to provide firms with greater flexibility in business decision making and enable them to exercise their judgement independently. The removal of prescriptive rules also reflects this shift in intention.
The main focus of the new rules is to keep client money safe – the impact of which has been considered by Sabrina Pearson.
A member of Kreston Reeves’ professional practices team, Pearson touched on the main issues raised in response to the changes, as well as considering their impact.
One of the main concerns highlighted was in relation to mixed payments. Currently, office money must be transferred within a period of 14 days after it has been paid into the client account. As Pearson states, this can lead to many firms suffering from technical breaches, even though no real threat to client money exists.
Put forward by the SRA, the proposed rule states: ‘You ensure that you allocate promptly any funds from mixed payments you receive to the correct client account or business account.’ (4.2)
The results of the consultation found that many respondents had trouble with the term ‘promptly’, describing its addition as ‘unnecessary’. Another view was that the amendment would leave client money at greater risk of manipulation.
Despite these criticisms, the SRA did not amend the rule, with the view when operating alongside other rules, compliance would result. Further guidance has been sought from the SRA as to the definition of ‘prompt’ in this rule.
Pearson then goes on to highlight another amendment, this time relating to the definition of client money. The suggested changes mean that any funds received in advance in respect of fees and disbursements would be treated as the firm’s money. This proposal was strongly opposed by firms, particularly in terms of the anticipated impact it would have on processes and systems. Any benefits for firms or clients were deemed as minimal.
However, the amendment that the SRA has implemented means that firms do not need to change their systems; although the definition now encompasses fees and disbursements, it is up until the point at which they are billed to the client.
For firms that don’t want to operate a client account, Pearson draws attention to an alternative option in the form of an exemption. Where this is used, the only client money a firm holds is advance payments for fees and advance payments for disbursements. As there will be no requirement for an accountant’s report, firms that use this exemption may save on compliance and professional indemnity insurance.
Although the impact of the rules may be minimal for firms, there is ample time for arrangements to be put in place; they will not come into effect until late 2018. In the meantime, Pearson reminds firms that the SRA will not expect them to operate any differently.
She does state, however, that the impact is likely to be more significant for accountants, especially in light of the shift toward professional judgement.
