ACCOUNTS RULES. John Staniforth Kingston Smith LLP 8 June 2012

Transcription

1 A PRACTICAL GUIDE TO THE SRA ACCOUNTS RULES John Staniforth John Staniforth Kingston Smith LLP 8 June 2012

2 Outline a) A general introduction i to the 2011 SRA accounts rules. b) A summary of the key changes from the 1998 rules. c) A comparison of the 2011 SRA Accounts s to the 1998 Solicitors Accounts s and a reminder of the key rules. d) The more common breaches of the rules. e) Futurereporting reporting requirements by the firm and the accountants.

3 a) A general introduction to the 2011 SRA accounts rules Solicitors Accounts s (SAR) = framework set by The Law Society and then Solicitors Regulation Authority (SRA) to ensure Solicitors effectively control and record client money, minimising risk of defrauding clients. Solicitors Accounts s 1998 replaced on 6 October 2011 by SRA Accounts s 2011 as part of introduction of outcomes focussed regulation (OFR).

4 a) A general introduction to the 2011 SRA accounts rules (contd) In short, OFR means SRA more concerned with outcomes than dictating how law firms choose to comply with the detailed rules. Desired outcomes are: client money is safe; clients and the public have confidence that client money held by firms will be safe; firms are managed in such a way, and with appropriatesystems andproceduresinplace place, so as to safeguard client money;

5 a) A general introduction to the 2011 SRA accounts rules (contd) client accounts are used for appropriate purposes p only; and the SRA is aware of issues in a firm relevant to the protection of client money s apply to all practices carried on from an office in England and Wales ( 3).

6 b) A summary of the key changes from the 1998 rules Top 10 key changes for 2011: 1. The name Solicitors Accounts s SRA Accounts s 2. Application of the rules A Solicitor You

7 b) A summary of the key changes from the 1998 rules (contd) Top 10 key changes for 2011: 3. New category of money Out of scope money Preparing for MDP s and unregulated money 4. Withdrawals Previous authority list becomes appropriate person

8 b) A summary of the key changes from the 1998 rules (contd) Top 10 key changes for 2011: 5. Withdrawals Electronic signatory now allowed 6. Interest Dtild Detailed rules removed Procedures and policy required

9 b) A summary of the key changes from the 1998 rules (contd) Top 10 key changes for 2011: 7. Accounting records Electronic copies of bankstatements allowed Must be tamper proof 8. Accounting records Bills no longer need to distinguish between paid and unpaid disbursements

10 b) A summary of the key changes from the 1998 rules (contd) Top 10 key changes for 2011: 9. New rules Overseas practices 10. numbers Removes repealed ldrules

11 c) A comparison of the 2011 SRA Accounts s to the 1998 Solicitors Accounts s and a reminder of the key rules The overarching objective and underlying principles Description 2 2 Interpretation Guidance notes do not form part of the rules 3 3 Geographical scope England and Wales 4 4 Persons governed by the rules Which parts of the rules affect solicitors and reporting accountants 5 5 Persons exempt from the rules Certain official roles 6 6 Principals responsibility for Principals and the COFA (Compliance compliance Officer for Finance and Administration) 7 7 Duty to remedy breaches Must remedy upon discovery. Duty spreads across all principals 8 Repealed

12 c) SRA Accounts s: Key s 1: The Overarching objective and underlying gprinciplesp The purpose of the rules is to keep client money safe. You must: a. keep other people s money separate from money belonging to you or your firm; b. keep other people s p money safely in a bank or building society account identifiable as a client account (except when the rules specifically provide otherwise); c. use each client s money for that client s matters only; d. use money held as trustee of a trust for the purposes of y p p that trust only;

13 c) SRA Accounts s: Key s 1: The Overarching objective and underlying gprinciples p (contd) e. establish and maintain proper accounting systems, and proper internal controls over those systems, to ensure compliance with the rules; f. keep proper accounting records to show accurately the position with regard to the money held for each client and trust; g. account for interest on other people s money in accordance with the rules; h. co operate with the SRA in checking compliance with the rules; and i. deliver annual accountant s reports as required by the rules.

14 c) SRA Accounts s: Key s 6 Principals responsibility for compliance The following must ensure compliance with the rules: ALL principals i in a firm Directors or members of a recognised/licensed body COFA of a firm Principal means a sole practitioner, a partner in a partnership, in the case of an LLP or company, the entity itself and the principal solicitor employed dby a non solicitor employer COFA Compliance Office for Finance and Administration

15 c) SRA Accounts s: Key s 7 Duty to remedy breaches Any breach of the rules must be remedied promptly upon discovery. This includes the replacement of any money improperly withheld or withdrawn from a client account. All the principals in a firm are responsible, not just the principal i causing the breach. Principal means a sole practitioner, a partner in a partnership, in the case of an LLP or company, the entity itself and the principal solicitor employed by a non solicitor employer

16 c) SRA Accounts s: Comparison 2011 to 1998 Part 1 General Description i 8 9 Liquidators, trustees in bankruptcy, Certain limited rules apply if the solicitor Court of Protection deputies and trustees of occupational pension schemes acts also as one of these 9 10 Joint accounts Where the solicitor holds money jointly with the client, another solicitor or another 3 rd party Operation of a client s own account Where the solicitor is a signatory on an account or operates it for a client under say a power of attorney. Generally the SAR rules do not apply but some do, mainly record keeping Firm s rights not affected Nothing in the rules deprives a solicitor of any recourse or right against client money sitting in client account Categories of money Defines client money and office money

17 c) SRA Accounts s: Key s 12 Categories of money All money held or received in the course of practice falls into oneor or other of thefollowing categories: Client money money held or received for a client or as trustee, and all other money which is NOT office money Office money money which belongs to you or your firm

18 c) SRA Accounts s: Key s 12 Categories of money (contd Client money includes money held or received: as trustee; as agent, bailee, stakeholder, or as the donee of a power of attorney, or as a liquidator, trustee in bankruptcy, Court of Protection deputy or trustee of an occupational pensionscheme; scheme; for payment of unpaid professional disbursements (fees of counsel or other lawyer, or of a professional or other agent or expert instructed by the solicitor);

19 c) SRA Accounts s: Key s 12 Categories of money (contd) Client money includes money held or received (continued): for payment of SDLT, Land Registry registration fees, telegraphic transfer fees and court fees; as a payment on account of costs generally; as a financial i benefit fit( (commission) i paid in respect of a client, unless the client has given the solicitor prior authority to retain ti it; jointly with another person outside the firm.

20 c) SRA Accounts s: Key s 12 Categories of money (contd) Office money includes: money held or received in connection with running the firm (Eg: PAYE, or VAT on the firm s fees); interest on general client accounts (thebank or building society should be instructed to credit such interest to the office account); payments received in respect of: fees due to the practice against a bill which has been given or sent to the client;

21 c) SRA Accounts s: Key s 12 Categories of money (contd) Office money includes (continued): paid disbursements; disbursements incurred but not yet paid by the practice, but excluding unpaid professional disbursements; money paidfor ortowards anagreed agreed fee; money held in a client account and earmarked for costs; and money held orreceivedreceived from thelegal Services Commission as a regular payment.

22 c) SRA Accounts s: Key s 12 Categories of money (contd) Fees the solicitor s own charges or profit costs (including any VAT element) Disbursements any sum spent or to be spent by a solicitor on behalf of the client (including any VAT element) Professional Disbursements the fees of counsel or other lawyer, or of a professional or other agent or expert instructed by the solicitor Costs a solicitors fees and disbursements

23 c) SRA Accounts s Key s 12 Categories of money (contd) Client v office monies Client Money on account of costs Disbursements: Unpaid professional Paid SDLT, HMLR fees, court fees, TT fees All anticipated disbursements Interest on separate designated deposit accounts Office Billed fees for work done Solicitor s own money (Partners and sole traders only) Disbursements: Any paid Paid SDLT, HMLR fees, court fees, TT fees Certain incurred non professional disbursements (if firm has credit a/c) Interest on general client account LSC monthly payments

24 c) SRA Accounts s: Comparison 2011 to 1998 Part 2 Client money and operation of a client account Description ClientAccounts Definitionsof of client accounts, including client in the title and where they can be held Use of a client account Defines how client money must be held including retention of funds at the end of a matter Client money withheld from client account on client s instructions Other client money withheld from a client account Can only be done if requested by the client and instructed or confirmed in writing Limited examples exist, such as cash received and paid straight out, unpaid professional disbursements or instructed by client or SRA 18 Repealed

25 c) SRA Accounts s: Key s MUST be: 13 Client Accounts a bank account at a branch (or head office) or a building society account at a branch (or head office) in England and Wales; in the name of the sole practitioner or the firm or the trustees; containing the word client in full in the name; and a bank account where the money is immediately available, even at the sacrifice of interest, unless the client otherwise instructs, or the circumstances clearly indicate otherwise.

26 c) SRA Accounts s: Key s 13 Client Accounts (contd) 2 Types of client accounts: Separate designated client account relates to a single client, other person or trust and includes a reference to the identity of the client, other person or trust in its title General client account which is any other client account

27 c) SRA Accounts s: Comparison 2011 to 1998 Part 2 Client money and operation of a client account Description Receipt and transfer of costs Defines how solicitors can receive office or client money, determine what it is and deal with it accordingly Receipt of mixed payments Includes a combination of client/office/out of scope funds Treatment of payments to legal aid practitioners Withdrawals from a client account Includes payments from the Legal Services Commission or from a third party Defines how money can be withdrawn, including residual balances under Method of and authority ty for Covers authority, ty, including cud geecto electronic c withdrawals from client account authority, and compliance with systems and procedures

28 c) SRA Accounts s: Key s 17 Receipts and transfer of costs Receipts When you receive money paid in full or part settlement of your bill you must follow 1 of the following 5 options: a. Determine composition of payment without delay and: i. If sum is office money and/or out of scope money only, MUST be placed in an office account; ii. iii. If sum is client money only, MUST be placed in a client account; If sum includes both, MUST follow 18 Receipt of mixed payments; or

29 c) SRA Accounts s: Key s 17 Receipts and transfer of costs (contd) b. ascertain that payment is only office /out of scope money, and/or client money in form of professional disbursements incurred but not yet paid, and; p y p, ; i. place the entire sum in office account; and ii. by end of 2 nd working day following receipt, either pay any unpaid professional disbursement, or transfer a sum for its settlement to a client account; or c. pay the entire sum into client account and transfer any office/out of scope money out of the client account within 14 days of receipt; or d. on receipt of costs from LSC, follow rule 19; or e. in relation to a cheque paid into a client account under rule 14(2)(e) (relating to Conditional Fee Arrangements), transfer the costs element out within 14 days.

30 c) SRA Accounts s: Key s 17 Receipts and transfer of costs (contd) Fees Solicitors who properly requires payment of their fees from money held for client or trust in a client account MUST first give or send a bill of costs to the client. Properly required work has been done Fees once solicitor has complied with above paragraph, money earmarked for costs becomes office money and MUST betransferred out of the client account within 14 days. Earmarked by the solicitor, not the client. Deemed earmarked unless indicated otherwise.

31 c) SRA Accounts s: Key s 18 Receipt of mixed payments Mixed payment includes both client and office/out of scope money money Mixed payment MUST either: a. be split between a client account and office account as appropriate; or b. be placed without t delay in a client account. If entire payment is placed in client account, all office/out of If entire payment is placed in client account, all office/out of scope money MUST be transferred out of client account within 14 days of receipt

32 c) SRA Accounts s: Key s 20 Withdrawals from a client account Client money can only be withdrawn from a client account when it is: a. properly required for payment to or on behalf of the client; b. properly required for a payment in the execution of a particular trust; p ; c. properly required for payment of a disbursement on behalf of a client or trust; d. properly required in full or partial reimbursement of money spent by solicitor on behalf of client or trust;

33 c) SRA Accounts s: Key s 20 Withdrawals from a client account (contd) e. transferred to another client account; f. withdrawn onthe client s instructions (either written or verbal confirmed in writing by Solicitor); g. transferred to an account other than a client account (such as an account outside England and Wales), or returned in cash, by a trustee inthe proper performance ofhisorher or her duties; h. refund to you of an advance no longer required to fund a payment on behalf of a client or trust;

34 c) SRA Accounts s: Key s 20 Withdrawals from a client account (contd) i. money paid into account in breach of rules; j. money not covered by a. to i. above, where you comply with the residual balance provisions; and k. money not covered by a. to i. above, withdrawn on written authorisation of the SRA. Money withdrawn in relation to a particular client or trust from a general client account must not exceed the money held on behalf of that client or trust in all the solicitor s general client accounts.

35 c) SRA Accounts s: Key s 21 Method of and authority for withdrawals from client account Withdrawal only made after a specific authority has been signed by an appropriate p person in accordance with the firm s procedures. An authority may be signed electronically, subject to safeguards. Appropriate person this will generally be a sole trader or manager (LLP member, company director or partner) but it can also be an employee and may not necessarily be a solicitor. They must however understand the rules.

36 c) SRA Accounts s: Comparison 2011 to Part 3 Interest Description When interest must be paid Account for interest when it is fair and reasonable to do so. Must have a written policy Amount of interest Fair and reasonable amount calculated over the period held Intereston stakeholder money Applies when solicitor holds money asa a stakeholder Contracting out May do so by written agreement and give client information i to make informed decision. Eg Sharia Law.

37 c) SRA Accounts s: Key s 22 When interest must be paid You must account for interest to a client for all interest when it is fair and reasonable to do so in all circumstances. You must have a written policy on payment of interest which seeks to provide a fair outcome. The terms must be drawn to the attention of the client at the outset. NO LONGER a de minimis amount of prescriptive p periods.

38 c) SRA Accounts s: Comparison 2011 to 1998 Part 4 Accounting systems and records Repealed Guidelines for accounting procedures and systems Restrictions on transfers between clients Executor, trustee or nominee companies Accounting records for client accounts, etc Accounting records for clients own accounts Description Current guidelines in App 3. Must be prepared to explain departurefromthem them. Private loans only permitted with prior written authority Applies where a firm owns all the share in a recognised body or a licensed body which is one of these Covers all required client account records Limited rules for clients own accounts

39 c) SRA Accounts s: Comparison 2011 to 1998 Part 5 Monitoring and investigation by the SRA Production of documents, information and explanations Description SRA powers and entitlements

40 c) SRA Accounts s: Comparison 2011 to 1998 Part 6 Accountants reports Description Delivery of accountants reports If held or received client money or operated client account, must deliver Accountant s Report within six months Accounting periods Normally 12 months but may be less or more Qualifications for making a Includes qualifications and disqualification report if negligent in making a report Reporting accountant s rights ih Required wording and duties letter of engagement Change of accountant Solicitor must notify SRA name and address of new accountant

41 c) SRA Accounts s: Comparison 2011 to 1998 Part6 Accountants reports Description Place of examination Must be done in solicitors office, unless there are exceptional circumstances Provision of details of bank The accountant must request and the accounts, etc. solicitor must provide details of all accounts, including non client accounts Test procedures Details the tests the accountant must do Departures from guidelines for accounting procedures and systems Matters outside the accountant s remit The accountant must report any substantial departures. 6 points listed remain unchanged

42 c) SRA Accounts s: Comparison 2011 to 1998 Part 6 Accountants reports Description Privileged documents If invoked, the report must be qualified and the circumstances explained Completion of checklist Mustbe retained for 3 years and available to the SRA on request. Included in App Form of accountant s report The accountant must complete and sign the report. Included in App Firms with two or more places of business Separate reports can be completed for different offices and cover different periods Waivers SRA can waive any of the requirements of Part 6 and revoke a waiver at any time

43 c) SRA Accounts s: Comparison 2011 to 1998 Part 7 Overseas practice Description 47 Purpose of the overseas Allows similar protection for client money but accounts provisions more adaptable for overseas jurisdictions 48 Application and Contains definitions relevant to overseas Interpretation practices. A firm must prioritise local rules 49 Interest Very similar to main SRA Accounts rules 50 Accounts Brief summary of the rules applicable overseas, a simplified version of the main rules. 51 Production of documents, information and explanations Covers compliance requirements 52 Waivers SRA can waive any of the requirements of Part 7 and revoke a waiver at any time

44 d) The more common breaches of the rules i. Debit Balances ( 20) ie; overdrawn bl balances on individual id client ld ledgers exception under 20.7 where can make payment for a particular client/trust, t even if no money (or insufficient money) is held for that client/trust provided: a. sufficient money held for that client/trust in a separate designated client account; and b. appropriate transfer from separate designated client account to general client account made immediately.

45 d) The more common breaches of the rules (contd) ii. Account Names ( 13) ie; client bank accounts that either do not contain the word client in their name at all or include an abbreviation of the word. ensure you check the title on the bank statement when new accounts opened.

46 d) The more common breaches of the rules (contd) iii. Geographical Scope ( 13) ie; opening a client bank account at a branch or head office outside England or Wales (Eg: Edinburgh). not a breach if Solicitors obtain a written confirmation from their clients that they want money eyto be held edoutside cetaccou client account (in which case covered by rule 15)

47 d) The more common breaches of the rules (contd) iv. Bank reconciliations ( 29) rarefor Solicitors to breach rule of carrying out bank reconciliations at least once every five weeks for general client accounts but solicitors often think this does not apply to designated deposits. rule 29 applies to all client accounts but no need to ask bank for confirmation of balance held in case of a separate designated client account operated with a passbook.

48 d) The more common breaches of the rules (contd) v. Transfer of billed costs ( 17) ie; Solicitors not transferring the money earmarked for their costs from client to office account within 14 days from date of sending the bill out. if law firm procedure is to prefer client approval to fees charged before funds transfer, recommend sending out a po pro forma o aor draft datbill first.

49 d) The more common breaches of the rules (contd) vi. Professional disbursements ( 20) ie; Solicitor not drawing and despatching a cheque for professional disbursements from office account before they are reimbursed by transferring the money from client account. often detected by reporting accountants from unusually usua high number of unpresented cheques equeson office account bank reconciliation.

50 e) Future reporting requirements by the firm and the accountants All law firms/abss MUST nominate an individual d as their Compliance Officer for Finance and Administration by 31 July SRA approval of COFAs by 31 October COFAs MUST: take all reasonable steps to ensure an authorised body and its employees and managers comply with any obligations imposed upon them under the SRA Accounts s;

51 e) Future reporting requirements by the firm and the accountants record any failure to comply and make such records available to the SRA on request; report any material failures (either material on its own or as part of a pattern of failure) to comply as soon as reasonably practicable; report any non material failure to comply in an annual report in the prescribed form and by the prescribed date.

52 e) Future reporting requirements by the firm and the accountants Material not defined but explained as oh no moment by one SRA representative Reporting Accountant s reporting requirements unchanged but expect to: enquire of any material failures reported to SRA in year; and inspect/review report of any non material failures in year.