Accounts: Accountants to deliver reports straight to SRA
All law firm accountant’s reports will have to be submitted to the Solicitors Regulation Authority (SRA) in future, and sole owners will not generally be allowed to hold compliance roles too, under proposals published today.
Following last year’s major consultation on holding client money, the regulator has today set out for further consultation the specific measures it wants to take forward.
It had already announced that the bigger-picture idea of changes to client account – and the interest solicitors earn on it – were on hold while more immediate changes were made.
These will help the SRA comply with the directions imposed on it by the Legal Services Board following the report into Axiom Ince.
At the moment, firms only have to submit their accountant’s report to the SRA if it is qualified.
However, a recent spot-check exercise found that of the 596 firms surveyed, 25 firms that were not exempt had not obtained an accountant’s report for their last accounting period.
A further 31 firms obtained their report after the deadline of six months from the end of the accounting period.
“These figures show a concerning level of non-compliance with, and potentially a lack of understanding of, our requirements to obtain an accountant’s report and submit it to us as necessary.”
The consultation proposes that all firms holding client money will have to make an annual declaration confirming whether they consider themselves exempt or, if not exempt, that they have instructed an accountant to prepare a report.
This will “incentivise compliance”, the SRA said, and “provide us with better information to identify potential non-compliance”.
The existing exemption criteria will remain, meaning no report is needed from firms only holding client money from the Legal Aid Agency during the accounting period, or those with an average client balance of no more than £10,000 over the accounting period, and where the balance has not exceeded £250,000 at any point during that time.
All accountant’s reports should be submitted, whether qualified or not, and the accountants will be required to submit their reports directly to the SRA, rather than leaving it to the firm.
Not submitting a declaration or report will be made subject to the fixed penalty regime the SRA uses for procedural and administrative failures. Even if the reporting accountant is to blame, the regulatory responsibility remains with the law firm.
The SRA also plans to update its guidance for reporting accountants to set an expectation for them to routinely obtain bank confirmations regarding firms’ client accounts.
But, in the wake of opposition from respondents, it is not taking forward the idea of requiring firms to periodically change their reporting accountant.
To address the risk of management, ownership and compliance roles being concentrated in one individual – as was the case with Axiom Ince – the SRA proposes that, within firms that meet specified risk thresholds, any individual who can unilaterally determine or direct significant management decisions in a firm cannot be the COLP or COFA.
Those thresholds would be firms with a turnover of at least £600,000 and/or holding a client account balance of £500,000 or higher at any point in the most recent reporting period.
There would be an exemption for sole owner-manager firms captured only by the client money requirement. For them, the unilateral decision maker could still be the COLP but not the COFA so as to introduce greater protection for client money.
The most recent figures show that 120 sole owner-manager firms reported an annual turnover exceeding £600,000, while around 480 had a turnover below that but above the client money balance threshold.
The money laundering compliance roles are unaffected by these changes.
But the SRA said this package – which also included enhanced guidance for compliance officers – did not address all of the issues identified in its earlier thematic review.
“There is a strong case for undertaking a more fundamental review of the compliance regime at a future point.
“This will include looking holistically at the range of different role holders within firms and whether these arrangements provide effective safeguards with accountability sitting at the right levels of seniority.”
The consultation said the SRA would be pressing ahead with some changes to the accounts rules that it has previously proposed:
- Rule 2.1(d), so that firms can only transfer client money to the office account once a bill or written notification has been produced for costs incurred;
- Rules 4.3, 4.3(a) and 4.3(c) and the addition of rule 4.4 to make clear that firms do not need to deliver a bill or written notification before reimbursing themselves where it relates to expenses incurred on behalf of the client.
But it will not progress the proposal to remove rule 2.3(c), which allows clients to agree different arrangements about when client money can be transferred to office account with informed consent.
Further, the regulator is not going to be more prescriptive about how much money firms can request in advance of work being done and the circumstances in which they can request it. “We have not seen evidence of a systemic issue that needs to be addressed at this time.”
It will also not introduce a timeframe within which firms must return residual balances, choosing instead to beef up the guidance.
There will be another consultation next year on the need to notify the SRA about mergers, acquisitions and other moves that significantly change firms’ risk profiles, rather than waiting for the annual practising certificate renewal exercise.
“Recently we have seen an increase in large firm failures and have identified examples of harms arising from firms growing beyond their competence, capacity or capability.
“We have seen problems arising in some cases from the failure to properly integrate people, systems and processes. At the extreme, we have seen allegations of a bad faith actor acquiring firms to defraud their client accounts.
“The changing legal services market and the changing risks to consumers that go with this has reinforced the need for us to strengthen our risk-based, proactive regulatory approach in relation to firms significantly changing their profile.”
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