Regulatory and Compliance Training & Consultancy

SRA Guidance on the SRA Accounts Rules [2019] Issued

15 September 2020

Long awaited guidance from the Solicitors Regulation Authority (SRA) on the SRA Accounts Rules has finally been published. However, there seems little doubt that some solicitors and legal cashiers will be left scratching their heads.

On Monday 14 September 2020, the SRA published their new guidance on the SRA Accounts Rules which were published as part of the SRA's new Standards and Regulations on 25 November 2019. If you have attended one of our training courses, live webinars or are a regular reader of our newsletters, you will know that there has been significant debate and confusion over the correct interpretation and therefore the proper application of the new SRA Accounts Rules.

Does the New Guidance Address all of the Uncertainties?

No. The new guidance focuses on two specific, but very important areas - the handling of money for costs and disbursements.

A Summary of the SRA's Guidance

The SRA‘s guidance starts off by highlighting the importance of considering the requirements of the SRA Accounts Rules in conjunction with the SRA Code of Conduct for Firms, the SRA Code of Conduct for Solicitors and the SRA’s fundamental Principles. The underlying message being that compliance with the SRA Accounts Rules alone may not be sufficient to fulfil the wider obligations contained within the Principles and two codes of conduct.

Both the SRA Code of Conduct for Firms and the SRA Code of Conduct for Solicitors contain provisions requiring that individuals and firms regulated by the SRA, safeguard money and assets entrusted to them by clients and others.

The SRA highlight four relevant Principles that regulated firms and individuals should consider, namely:

Principle 2: You act in a way that upholds public trust and confidence in the solicitors' profession and in legal services provided by authorised persons.
Principle 4: You act with honesty.
Principle 5: You act with integrity.
Principle 7: You must act in the best interests of each client.

The SRA emphasise the importance of being open and transparent in dealings with the client or third party who has entrusted you with their money. Additionally, the SRA's expectation is that firms make sure that clients receive the best possible information about how their money will be used or is being used during the course of a matter and in a way they can understand, so that they can make informed decisions.

The SRA‘s guidance makes it abundantly clear that the following types of money would be considered to be clients’ money under the SRA Accounts Rules, subject to the exemptions contained within Rules 2.2 and 2.3:

• Money received for the firm's legal fees, based on an estimate of their likely costs or as a fixed fee;
• Money received for unpaid disbursements, such as Counsel‘s or expert’s fees; or
• Money received in relation to the transaction on which the firm is acting for a client, such as money for the deposit on a house purchase to enable contracts to be exchanged.

The SRA guidance notes that in the majority of transactions, firms send a bill of their costs to the client after completion of the matter on which they are instructed or as an interim bill, if the matter is likely to be a lengthy one. The SRA highlight that when payment in settlement of that bill is received, the firm can properly pay that money into the firm's business account. However, the SRA expect that prior to the delivery of any such bill, the firm have informed the client about how their matter will be priced and that the client is kept updated as to the likely overall cost of the matter so that the bill should not come as a surprise to the client.

The SRA‘s guidance recognises that in some cases firms may request payment of their costs in advance of work being done, acknowledging that cash flow issues are a common challenge for many firms. The guidance clarifies that requesting or billing for costs in advance is permissible under the SRA Accounts Rules, provided the firm is always acting in accordance with the wider requirements of the SRA’s Standards and Regulations to safeguard money that has been entrusted to the firm.

The SRA‘s guidance recognises that a firm might wish to consider sending a bill to a client for their anticipated fees and disbursements, with a view to paying the money received in payment of that bill into the firm’s business account, as seemingly provided for by Rule 2.1 (d) of the SRA Accounts. The SRA note that the SRA Accounts Rules provide a degree of flexibility and enable firms to consider the most effective way to deal with their client‘s matter and how to run their business. However, the SRA again goes on to stress that such flexibility has to be operated in the context of the wider obligations set out in the SRA’s Standards and Regulations as outlined above.

The SRA guidance states that there are clear risks to a client if a firm bills for, and then pays into the firm's business account, money for legal work that the firm has not yet done or for disbursements that have not yet been incurred. The risks identified by the SRA include:

• The client deciding to terminate their retainer and requesting the repayment of money they have paid. Can the firm pay it back immediately?
• The matter on which the firm is instructed does not proceed, for example the other side pulls out of a transaction. Can the firm pay back the money you have received immediately?
• The firm suddenly having to close due to incapacity or the death of a sole practitioner. Will those dealing with that closure be able to repay immediately the client?
• The firm becomes subject to an insolvency event - and the client‘s money is absorbed into the insolvent’s estate as it is not held in a ringfenced client account. How will the client be able to progress their matter or pay any disbursements due if they have already paid in advance for these and the insolvency practitioner refuses to repay the client‘s money because it is held in the firm’s business account?

The SRA guidance states that you have an ongoing duty to safeguard money and assets that have been entrusted to you and not prefer your own interests, for example in maintaining cashflow, over those of your clients. The obligation to safeguard money entrusted to you is not limited only to that money which is held in a client account.

The SRA considers that firms need to think very carefully about the reasons why they are billing for these sums in advance and the risks to your client in your paying these monies into your firm‘s business account. Despite many experts interpreting the rules differently, the SRA clearly have a different approach. They say in their guidance that it is important to remember that, in their view, the sending of a bill in these circumstances does change the fact that this money remains the client’s money and should still be safeguarded. The SRA go on to say that in all cases, a firm will need to think carefully about whether the broader obligations properly allow them to bill for such payments and receive money into their business account.

The SRA are not saying that you cannot hold money in the business account that has been billed in advance for the firm's fees or unpaid disbursements, but the wording of the guidance makes it clear that there are significant risks in doing so. Perhaps a change to the definition of client money to make it evident that money for work that has not yet been undertaken, or disbursements that have yet to be paid, is client money and should, therefore, remain in client account, would have added the certainty that so many firms and individuals operating in the legal sector would have preferred?

The SRA are more explicit in their expectations in relation to certain types of unpaid disbursements noting in their guidance that they would not expect firms to bill for advance disbursements that the client will remain liable to pay for, such as Stamp Duty Land Tax and to receive such money into the firm‘s business account. The SRA clearly state that in their view, this would be improper and a breach of their Standards and Regulations. The guidance highlights that until the disbursement is paid the client remains liable for it and this may be for a significant sum. Therefore, any risk to the firm’s business account could result in the transaction failing or the client having to pay twice. Billing to receive money in these circumstances is likely to fail to meet obligations to act in the best interests of your client, safeguard their money or possibly act with integrity.

The SRA expect that where you may be considering billing for such advance payments, you think carefully about whether your broader obligations properly allow you to do this. If you do consider it is proper, the SRA expect you to make sure that your client is fully informed of the risks around their money being received into your firm's business account. They suggest that how you explain the risks to clients may depend on the nature of your client and any vulnerability they may have.

The SRA consider that knowing these risks, your client might only be prepared to pay a bill sent for work that has been done and disbursements for which you are liable and have been incurred by you.

The SRA's guidance also highlights the need to consider the VAT implications of having money in your business account if you have not yet rendered any services to your client, and the risk that your Reporting Accountant is also likely to qualify thier report if their view is such that money belonging to your client is, has been or may be, placed at risk.

It is hard not to conclude that many reading this guidance will be asking themselves ‘can I or can’t I?‘, or perhaps, ’should I or shouldn‘t I?’. One thing is clear, unless you have an appetite for risk, the safe approach is to treat money received for work not yet undertaken or for unpaid disbursements as client money and retain it in your client account until the work has been completed or the disbursement has been paid.

The SRA‘s guidance goes on to consider what a firm should do where money is being held on a client’s ledger account and the firm wants to move money for their costs into the firm's business account. In this situation, the firm will need to comply with rule 4.3(a), which is intended to provide a safeguard to the client or paying party, and requires that the firm must first give a bill of costs, or other written notification of the costs incurred, to the client or the paying party.

Interestingly, and for some inconveniently, the SRA's guidance highlights their expectation that firms make sure that the bill sets out only those fees and disbursements that have been incurred.

A number of individuals and firms have been concerned that the proper interpretation of Rule 4.3 of the SRA Accounts Rules required them to transfer money for unpaid disbursements from the client account to the business account once a bill had been given to the client, even if they would prefer to retain those funds on client account until the disbursement has been paid. Indeed, guidance to this effect has previously appeared on the SRA website. It is, therefore, reassuring to see that the SRA have said that where the bill does include anticipated disbursements which have not yet been incurred, you will not be considered to be in breach of rule 4.3 by leaving the money associated with those billed anticipated disbursements in the client bank account until such time as they are paid.

The SRA‘s guidance goes on to reiterate their concerns about the risks to your client if you bill for legal work that you have not yet done or for disbursements that have not yet been incurred and as a result, you take the client’s money into your firm‘s business account and the need to consider the risks and factors previously mentioned. For good measure the SRA also repeat the risk that the firm’s Reporting Accountant may qualify their report if they think these risks are serious or not justified by the circumstances of the case.

Once again, the risk averse will conclude that the only safe approach is to treat money being held within the client bank account on behalf of a client, for work not yet undertaken or for unpaid disbursements, as client money and to retain it in the client bank account until the work has been completed or the disbursements have been paid.

Another common concern amongst the regulated community has been that Rule 4.3 of the SRA Accounts Rules, by use of the word ‘costs’ rather than ‘fees’, required firms to send a bill to their client before transferring money from the client bank account to the firm‘s business account in respect of not just their professional fees but also any disbursements. Again, firms will welcome the SRA’s confirmation that in their view Rule 5.1 of the SRA Accounts Rules allows for money for paid disbursements to be transferred from the firm's client account to the business account as the money is being used for the purpose for which it is being held.

The SRA's guidance on this point notes their expectation that you should explain to your client how and when payments might be made on their behalf from your business account and that you will then be seeking a reimbursement from the client account in accordance with Rule 5, before adding that, you could do this in your client care letter, terms of engagement or in other communication with your client. The SRA state that they see no risks to the client in your reimbursing your firm for payments you have already made.

If you want to find out more about the new SRA Accounts Rules [2019], our two-hour live webinar, ‘A Practical Guide to the SRA Accounts Rules [2019]’ will provide an in depth analysis and consideration of the new rules.

The introduction of the new SRA Accounts Rules represents the ideal opportunity to provide in-house training for your fee earners and managers as well as your accounts staff. Due to the current Covid-19 restrictions, in-house training is being provided via the GoToMeeting or GoToWebinar platforms dependent on the number of delegates participating. There is an option to record the session so that it is available to those unable to participate or for new starters to view in the future. In-house training can be tailored to the firm‘s actual policies and procedures to make it as relevant as possible. For more information about a bespoke ’in-house' online training course for your firm please contact Richard Lane by calling now on 0330 223 5346 or by e-mail to info@lfpro.co.uk.

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