In ICAEW’s recent webinar, Janet Taylor of Taylor Mowbray LLP and Andrew Baker of RSM UK discussed recent regulatory insights and took a deep dive into some of the practical issues of SRA Accounts governing residual balances and managing client money.
The webinar began with an overview of the current landscape surrounding the Solicitors Regulation Authority (SRA) Accounts Rules, highlighting the SRA's increasingly stringent expectations in light of recent high-profile failures such as the Axiom case. Janet and Andrew noted that these events, together with recent consultations and regulatory developments, have shaped the SRA’s tolerance around breaches of the rules. The SRA now expects firms to be proactive, well-informed and vigilant in addressing issues related to client money management and compliance breaches.
Throughout the session, key rules and guidance were recapped, with particular emphasis on the prompt return of client money (Rule 2.5), the prevention of improper use of client accounts (Rule 3.3) and the importance of understanding updated SRA guidance and warning notices. The discussion also covered the SRA's increased fining powers and the expectation that firms maintain robust procedures and systems to manage client funds effectively and avoid breaches, ensuring ongoing compliance and the maintenance of client trust.
Residual balances (Rule 2.5)
Residual balances were identified as a top concern. Janet and Andrew discussed the importance of returning client money promptly once there is no longer a valid reason to hold it. They acknowledged that the conclusion of a matter is not always clear-cut, highlighting case studies to demonstrate this, but that many law firms could improve their practices in this area. The SRA is particularly vigilant about residual balances as they can pose risks if not managed properly. Delays in returning funds are often due to administrative reasons but the SRA is keen to ensure that firms do not misuse these funds, whether intentionally or not.
Improper use of client accounts (Rules 3.3 and 2.1)
Rule 3.3, which prohibits the provision of banking facilities, was a significant focus. It was explained that this rule is designed to prevent law firms from acting as banks for their clients. It was emphasised that any transfers between client matter ledgers must be scrutinised to ensure they do not constitute banking facilities. The SRA's latest warning notice from March 2023 was highlighted, stressing the importance of understanding and adhering to the red flags and guidelines it outlines, however, it is hoped that updated guidance will be available by the end of 2025. Janet and Andrew also touched on Rule 2.1, which deals with the receipt of client money and the importance of ensuring it is handled correctly.
Managing COAs (Rule 10.1)
COAs were discussed as a high-risk area. Janet and Andrew noted that while some accounts, such as those under Court of Protection, are well-regulated, others, like those involving lasting powers of attorney, can be more problematic. They stressed the importance of having robust controls and procedures in place to manage these accounts and ensure compliance with Rule 10.1. This includes maintaining a central register and ensuring that transactions are properly recorded and reviewed by someone other than the person handling the account.
Practical issues
Andrew delved into practical issues that firms face, such as setting up engagements correctly and ensuring proper interaction between fee earners, clients and the finance team. He stressed the importance of having clear engagement terms and understanding the client's structure and funding sources. The need for ongoing communication and regular updates to client details and engagement terms was highlighted. He also discussed the risks associated with retainer accounts and the importance of closing matter accounts promptly to avoid potential issues.
Key takeaways
The key takeaways for the audience included the need for prompt return of client funds, vigilance in avoiding breaches of Rule 3.3 and the importance of clear and ongoing communication with clients. Firms were encouraged to be proactive in addressing potential issues and to ensure that their procedures and systems are up to date and compliant with the latest SRA guidance. By doing so, firms can mitigate risks and maintain the trust and confidence of their clients.
This webinar offered valuable guidance for firms looking to enhance their compliance with the SRA accounts rules and maintaining systems to manage client money effectively to mitigate potential risks. The full recording of the webinar can be found below. For practical tips on how to navigate through these issues, please reach out to Janet Taylor or Andrew Baker who will be happy to discuss matters further.
*the views expressed are the author's and not ICAEW's