New definition of ‘client money’ dropped but SRA gives green light to third-party accounts

Passmore: lower insurance premiums and smaller SRA

The Solicitors Regulation Authority (SRA) has dropped a new definition of ‘client money’ which would have excluded fees and disbursements in response to the concerns of practitioners, but is otherwise moving ahead with a huge rewrite of the accounts rules that reduces them from 41 pages to just seven.

The rules will make clear that third-party managed accounts (TPMFs) akin to the Bar Council’s Barco are acceptable for law firms, with SRA policy director Crispin Passmore saying there was interest from both the profession and potential providers in such arrangements.

With implementation planned for the end of 2018, the rules will go hand in hand with the new slimline code of conduct, also unveiled today, as the regulator bids to put more trust in solicitors’ professional judgement than prescriptive rules.

The response to the consultation it issued a year ago, published today, said: “We do not need pages and pages of prescriptive rules for a solicitor or firms to do the right thing and maintain professional standards.

“For instance, all good solicitors know that they should not steal money belonging to their clients. We do not think they need – or benefit – from more than 40 pages of detailed accounts rules setting out how to avoid stealing.”

It said the minute detail contained in the current accounts rules “creates logistical problems for some firms to be compliant and makes it difficult for many firms to comply at all. Such complexity often ends up resulting in technical breaches. It drives confusion, cost and non-compliance rather than good practice”.

The most contentious issue was the proposed new definition of client money. The SRA said it was “clearly told” that it would force all firms to change their systems and incur significant costs in doing so.

“This would impose a cost of compliance that does not exist for any of our other reforms. While many firms have been positive about the changes to the definition, the majority wish to continue to operate as they do now and feel strongly about doing so.”

One example was the treatment of VAT. Currently, VAT is not payable on advance payments held in the client account until the matter is billed, as these funds do not belong to the firm.

But changing the definition as proposed would make VAT payable by the firm at an earlier stage than at present. This in turn would mean that firms would need to change their accounting systems and software to accommodate earlier VAT payments.

Several firms – mainly litigation practices – also told the regulator that a restriction on holding payments on account in client account would deter their clients from making advance payments at all and significantly affect the viability of their business.

“It is common practice for litigation firms to require payment on account due to the risks of non-payment.”

The revised definition says that all monies paid in advance for fees and disbursements before a bill has been issued must be paid into client account.

It provides an exemption so that where the only client money that is received is advance payments for fees and unpaid disbursements for which the firm is liable, that money does not have to be held in client account.

There was general support for TPMAs. The SRA will require that TPMA providers will have to be regulated by the Financial Conduct Authority, while solicitors would be required to assess the suitability of the product in the particular circumstances and for the particular client.

“We would also expect that clients understand that the basis on which the money is held and that it is different to a regular client account.”

The solicitor would not be responsible for the monies in the TPMA, as these are held by the TPMA provider and are not under the solicitor’s direct control. The solicitor will however be required to ensure that they comply with the requirements in the accounts rules relating to the use of TPMAs.

In a briefing yesterday on the changes, Mr Passmore said that if the interest in TPMAs that has been signalled to the regulator was borne out, then indemnity insurance costs and even the size of the SRA itself could fall.

More generally, the SRA acknowledged that the new rules would mean a change in approach for many firms.

“The new rules are intended to give firms more flexibility to decide what is best for their clients and for their business while being very clear as to the standards we expect.

“We expect that many firms, at least at first, will continue to operate as they do under the current rules and in doing so will remain compliant with the new accounts rules. For those firms that want to make changes, we will be providing a range of supporting materials through our toolkit.”

Other changes to the rules include removing the reference to the firm’s compliance officer for finance and administration (COFA) being jointly and severally liable with the firm’s managers, for compliance.

“This emphasises the responsibility of the firm’s managers for ensuring that the requirements in the accounts rules are embedded within the firm’s systems. The COFAs responsibilities remain unchanged from the current position.”

It also introduces a rule exempting payments from the Legal Aid Agency from being held in client account.

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