6 common SRA Accounts Rules breaches

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By Sadie Archibald, Assistant Manager, Legal Sector Audit Team

It has now been almost five years since the Solicitors Regulation Authority (SRA) Accounts Rules changes in November 2019. This means we have a few years data to establish the most common breaches we see under the new rules.

Set out below are details of the most common breaches we identify and advice on how to manage these internally.

1. Residual balances

Residual balances still remains the most common breach we see.

Rule 2.5 states: You ensure that client money is returned promptly to the client, or the third party for whom the money is held, as soon as there is no longer any proper reason to hold those funds.

Residual balances should be dealt with ‘promptly’ and adequate attempts to return the funds should be made. When reviewing residual balances, we often see attempts to return funds being made just before the year end that is under review. Unfortunately, ‘adequate attempts’ is not just the number of attempts but also the timing of those communications.

For example, a £50 residual balance has been held on account since January 2020. There are a number of internal communications on file from accounting to the fee earner and vice versa, however no communication has been made to the client until November 2021.

There is no de-minimis for residual balances so all balances irrespective of the amount need to be dealt with ‘promptly’.

The internal procedure we mostly see is the accounts department sending a weekly / monthly email to fee earners to review, unfortunately more often than not this just becomes a routine and little progress is made.

We recommend running weekly reports, with specific tasks set as a result, and ensuring fee earners are aware of the consequences of these residual balances.

 

2. Office credit balances

Rule 4: Client money must be kept separate from money belonging to the authorised body

There are a number of valid reasons for office credit balances e.g. refunds from third parties and clients paying funds direct into the office account. The funds, however, must be transferred from office to client ‘promptly’.  Although ‘promptly’ is subjective from firm to firm, we would recommend that office credit balances do not extend to more than a few days, ideally being transferred from office to client on the same or next working day.

Running weekly reports for office credit balances and investigating and resolving potential issues immediately upon discovery is recommended in this area.

 

3. Payments to charity

Rule 5: Withdrawals from client account

It can be tempting to transfer small balances to charity rather than attempting to return sums to clients, due to the administrative time involved. In addition, the cost of sending a cheque can sometimes outweighing the balance itself. As a result of this we often see small residual balances being paid to charity without the client’s authority or any attempts to return their money.

We understand the difficulties of dealing with these balances; nonetheless (as with Rule 2.5) there is no de-minimis level, therefore attempts to return balances to clients or having their authority prior to paying such sums to charity is required, however small the balance.

This can be frustrating for firms but numerous immaterial balances can soon amount to hundreds (sometimes thousands!) of pounds of client money.

We recommend running a monthly residual balance report and identifying small balances that could be cleared swiftly by simply emailing the client to ask them if they would like the money returned to them, potentially offering to pay the sum to charity if they would prefer.

 

4. Duty to correct breaches upon discovery

Rule 6: Duty to correct breaches upon discovery

A detail we also look at during our review is if breaches noted in the previous year’s audit report have been dealt with. This typically occurs with breaches relating to:

• Suspense ledgers
• Immaterial historical balances
• Residual balances

If specific action needs to be taken with a breach identified, this should be done promptly following receipt of the auditor’s report. If you have difficulty correcting breaches, we are always happy to discuss and advise our clients further.

 

5. Suspense ledgers

Rule 8 states: Client accounting systems and controls

Suspense ledgers are perfectly acceptable and, used correctly, can be beneficial. However it’s important to remember that suspense ledgers should regularly be brought down to nil and only used on a temporary basis.

If you find that a suspense ledger cannot be brought to nil, a reconciliation should be performed and any historic unidentified balances should be investigated and cleared.

 

6. Billing

Another recurring breach we identify is costs for disbursements been transferred without a notification of costs or bill provided to client.

Rule 4.3 states: Where you are holding client money and some or all of that money will be used to pay your costs:

1. you must give a bill of costs, or other written notification of the costs incurred, to the client or the paying party;
2. this must be done before you transfer any client money from a client account to make the payment; and
3. any such payment must be for the specific sum identified in the bill of costs, or other written notification of the costs incurred, and covered by the amount held for the particular client or third party.

A notification of costs can include advance notice in a client care letter, but if adopting this approach, it is essential to recognise that the specific sum is identified. If not, a separate notification of actual costs is required.

We understand the SRA has identified that this can be time consuming and are currently reviewing this rule.