SRA Accounts Rules 2019 – is your law firm being compliant?

After years of deliberating, the new Solicitors Accounts Rules were introduced on 25 November 2019 with immediate effect. From this date, solicitors and law firms could no longer follow the previous rules (namely AR’11 rules) and were required to update their policies and procedures to be in line with the updated 2019 SRA rules. 

Shortly after their introduction, the world went into lockdown leaving law firms having to contend with the new rules while also managing the challenges of COVID-19.  In response to this, while still expecting full compliance, the SRA announced that they recognised the exceptional circumstances under which the rules were introduced. However one year on, we expect the SRA to take stronger action on any minor breaches. Here we explain how the rules differ, and highlight areas where we have seen breaches over the past year.

Key changes in the SRA Accounts Rules 2019

Although there are some similarities between the ‘old’ and ‘new’ rules, there are a number of changes, including:

• The number of rules has decreased from 52 to just 13
• The rules are less specific, using words such as ‘promptly’ or ‘regular’ as opposed to referring to specific time frames

The key takeaway from these new rules is that they give firms the opportunity to follow them in a way that suits them, as opposed to a ‘one size fits all’ approach.

Can we just apply the old rules?

Generally, if your firm carries on adhering to the ‘old’ rules, then this won’t be a breach of the new 2019 rules. However, this will need to be specified within the firm’s policies and procedures. For example, ‘monies are transferred from the client account to the business account within 14 days of a bill being raised’. The policies cannot just state that the firm is following the 2011 rules.

The firm is required to specify, in writing, their policies and procedures in respect of the following rules:

• Rule 2.3 - You must ensure that client money is paid promptly into a client account.
• Rule 2.5 - You ensure that client money is returned promptly to the client or the third party for whom the money is held, as soon as there is no longer any proper reason to hold those funds.
• Rule 4.2 - You ensure that you allocate promptly any funds from mixed payments you receive to the correct client account or business account.
• Rule 5.2 - You appropriately authorise and supervise all withdrawals made from the client account.
• Rule 6.1 - You correct any breaches of these rules promptly upon discovery. Any money improperly withheld or withdrawn from a client account must be immediately paid into the account or replaced as appropriate.
• Rule 7.1 - You account to clients or third parties for a fair sum of interest on any client money held by you on their behalf.
• Rule 11.2 - You obtain regular statements from the provider of the third party managed account and ensure that these accurately reflect all transactions on the account.

Compliance with these rules is where we have seen the majority of breaches and we would recommend that all firms review their written policies and procedures in these areas.

Common breaches of the Solicitors Accounts Rules 2019

As would be expected with such a big change in rules and regulations, this past year we have identified more breaches than we would usually see as part of our work on the Solicitors Accounts Rules. 

Some of the breaches that we have come across are similar to those we have seen in previous years. For example, funds not being transferred from the client account to the office account in good time (be this 14 days under the 2011 rules or in line with the firm’s procedures under the 2019 rules). However, we have also seen firms breaching the new rules due to slight differences in the wording.

One rule we have seen a number of breaches of is rule 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."

Although firms are, on the whole, preparing bank reconciliations every 5 weeks, it is not always clear they have been signed off by the COFA or a manager of the firm. COFAs or managers need to ensure there is evidence they have reviewed the reconciliations and signed them off.  An electronic signature would be perfectly acceptable.

Staying with bank reconciliations, another rule that we have seen breached multiple times is rule 10.1(b), which states that firms must prepare reconciliations for clients' own accounts. This was not a requirement under the 2011 rules (although it was still suggested as good practice). If firms run clients' own accounts, they need to ensure they are preparing bank reconciliations at least every 5 weeks and that these are being reviewed and signed by the COFA. 

Although the changes in the rules are not drastic, it is important that team members, especially the COFA, have a good understanding of what they are required to do. As long as the firm’s policies and procedures are up to date and in line with the rules, then firms should be well prepared for these updated rules.