Today marks the introduction of the Solicitors Accounts Rules 2019 which replace the previous Solicitors Accounts Rules 2011. Such a hiatus between the revision of rules suggests reform of a monumental measure and, though clients may not be aware, there has been much hype surrounding the new rules which have been in the making for a number of years. Initial releases of the proposed changes sent waves through the legal community with many declaring the changes too radical. Consultations have taken place with several professional bodies such as The Law Society and The Institute of Legal Finance Management, and the rules have been revised a number of times pre release. The principles of the new rules have not changed - they are there to protect client money - but their volume has. The latest revision sees the rules reduced from 52 to 13, resulting in less prescriptive rules and, some would argue, less industry guidance.
Undoubtedly one of the main differences is that law firms are no longer required to have a separate designated client account. They are now entitled to hold client money in an office account, provided it is effectively on account of costs, identifiable and posted separately on an accounts system to ring fence against improper use. In practical terms, what does this mean for firms?
Firstly, let us examine the benefits of doing away with the need for a client account. The removal of the responsibility of setting up, maintaining and using a bank account must surely be less onerous for firms. At the very least, it would reduce the amount of five week reconciliations which need to be carried out and signed off by the COFA and, in many firms, would remove the need for a legal cashier to understand and manage the funds in the client account, representing a cost and training saving.
We must also not forget that firms are charged an annual periodical fee to hold client money, if there is no client account, and client monies are only held for specific purpose relating to the eventual payment of fees or disbursements, there is another cost saving for each firm of solicitors.
Finally, the removal of the client account would result in less reporting obligations in terms of delivering an annual accountants report. If there is little to no client money held, which is likely if it is held in the office account, an exemption regarding the obtaining and submitting of an accountants report would almost certainly apply.
Based on this, the disadvantages of not having a separate client account would be increased workload and increased cost. However, there are other limitations which need to be considered; a reduction of the types of client money that can be held immediately narrows the service available to clients. A firm would be unable to, for example, carry out probate work as this naturally involves collecting and distributing funds relating to the estate, which requires the ability to hold client money that is not on account of
costs. Any funds which came into the office account which did not relate to costs would breach the new rules.
In practical terms, this means that if there were a situation where a client paid funds for a Counsels fee into the office account, the bill was delivered and the funds paid over, and then it came to light that the client had been overcharged and Counsel issued a repayment of the overpayment, the rules would be breached. There are regulations which require every breach to be registered centrally at a firm, and the risk of breaches occurring must surely be higher when the scope of the funds entitled to be held are narrowed so significantly. This, in turn, leads to a heavier workload, rather than the reduced one suggested above, and is likely to be identified as a weakness in the system in the annual accounts report, leading to qualification of the report and increased delivery of reports to the regulatory body.
The effect on cash management and cash flow needs to be considered too, even if the funds in your office account are designated as client account funds on your accounting system, the high cash figure in your bank account may lead to an inaccurate assumption about cash flow resulting in a cash rich firm with potential insolvency issues. The temptation to utilise client funds as working capital must be higher than if the funds are kept separately. On top of this, the 48 hour rule, which required firms to onward pay any third party disbursements has been abolished and replaced with a requirement to pay “promptly”, which each individual firm is allowed to define. If a firm with poor cash management and or debtor days defines promptly as ‘within 30 days’ they would effectively be using client funds as a loan facility.
Finally, we need to consider the accounts systems in place at the majority of firms. Solicitors firms have always been unique in the way that they account because of the nuances of keeping client funds separately to office funds. Automated accounts systems are designed to follow these standards and do not have the facility to identify funds in the office account as client funds. This again, could lead to confusion, particularly where amounts held are large and clients are plentiful.
It would therefore seem that although the fundamentals of the rules remain the same, in that they are there to protect client funds, the practicalities of the changes to the rules potentially encourage firms away from this stance. In an age where regulatory and compliance requirements are becoming more and more risk based, it must be appropriate for the majority of law firms to continue to hold a separate designated client account to reduce the risk of misuse rather than opt out simply to enable them to reduce work load and cost. At Sinclair Gibson it is important to us that we are able to offer a full and transparent service to our clients and we shall therefore continue to hold a separate client account and ensure that our training across the board is such that client funds remain fully protected.