Solicitors' Accounts Rules SARs - client money rules; a brief overview
and changes to the solicitors accounts rules 2011
Information about Solicitors account rules SAR is provided by the Solicitors Regulatory Authority SRA in 50 rules, and notes to the rules, listed in parts A to G and referring to Appendices: 1 to 6
- Changes to solicitors accounts rules:
- There are new solicitors accounts rules 2011 with effect from 6 October 2011 key changes summarised below.
- Amendments are part of the new SRA handbook 2011; changes are extensive including:
- Rules re-numbering.
- Lettered headings have become equivalent numbered headings A is 1, B is 2 etc.
- Your accounting period, which straddles this date, is subject to old rules up to 5 October 2011 and new rules from 6 October 2011.
- Transitional arrangements, proposed Transitional arrangements were deleted from the final version.
- Full draft update details and our reference to highlighted SRA account rule changes, main points, are in 2011 draft Old to new rules highlights.pdf
Holding client money
If you are a solicitor, or work in the legal profession, you need to determine whether Solicitors account rules affect you. If they do, you need to understand them and keep up to date with Continuing professional development CPD courses regularly. Where CPD is not up to date a reporting accountant may form the view that the assignment is of higher risk and will require more work making it more costly.
A solicitor must keep client money separate from practice money in a client account with a recognised bank or building society and use that money only for each particular client purposes and to pay clients interest as specified. Client accounts must be subject to proper record-keeping and an annual accountant's report. Terminology is specified in rules 2 to 5 including rule 2 (2) (c) and (d) permitted banks and building societies. Rule 4 Persons governed, note (i) says "All employees ...", which will include book-keeping and accounting staff, and rule 5 Persons exempt. Rule 6 All the principals of the practice are responsible for compliance and rule 7 remedy of breaches. Rules 9 to 11 define a large number of particular circumstances and rule 13 gives categories of money defined as client money. Rule 13 (a) and (b) Office money belongs to the solicitor all other is client money.
Client money paid into the office account by mistake must be "... remedied promptly upon discovery." Reporting accountants may take the view that this is a trivial breach but this must be reported and explained if involving "... significant differences between liabilities to clients and client money held ... "
Part B - Client money and operation of a client account, rules 14 to 23
Part B is the intricate day-to-day detail essential to compliance
Applicable client accounts must be held in the firm's name or trustee name where this applies. The account is either general or designated to a particular client. Client money must be paid into the client account without delay and the balance returned to the client when there is no longer a reason to retain it.
Rule 15 defines the use of the client account.
Rule 15 - 2 Says that only client money may be paid into ... a client account, except: Rule 15 - 2(a) an amount of the solicitor's own money required to open or maintain the account;
Rule 15 - 3 and 15 - 4 deal with return or retention of client funds; old balances should not arise.
and Rule 15 note (ix) says that solicitors may not provide banking facilities for clients.
Rules 16 and 17: There are tightly drawn exceptions to when client money may be held outside a clients account.
Rules 19 and 20 deal with receipts of sums including both client funds and solicitors fees in relation to client accounts; the definition of each and the transition from client funds to office funds. Funds received or held and transferred from clients accounts for settlement of fees must be carefully controlled and invoices and explanations must simultaneously be sent to the client as applicable.
14 days Rule 19 - 3
The funds must then be transferred to the office account within 14 days.
Rule 19 notes (D) (xii) Undrawn costs must not remain in a client account as a "cushion" ...
Rule 21 deals with legal aid.
Rules 22 and 23 deal with withdrawals from client accounts. Rule 22 - 2 (ga) old small balances. Rule 22 - 5 says Money withdrawn ... must not exceed the money held on behalf of that client.
Rule 23 is - Method of and authority for withdrawals, generally the solicitor or manager must authorize. Rule 23 -3 note (a) (ii) says Signing a blank cheque is not a specific authority.
Part C - Interest rules 24 to 28
The solicitor must act fairly in ensuring reasonable interest is earned and in paying interest to the client; parameters are defined.
Part D - Accounting systems and records rules 29 to 33
Rule 29 The current guidelines appear at Appendix 3 paragraphs 1 to 5.
Compliance is the equal responsibility of all partners. There should be a copy or online access to the Solicitors' Accounts Rules and the person maintaining the books must have a full knowledge of these. A proper system of accounting should be kept up to date. Paragraphs 3 and 4 define how systems should control receipts and payments on the clients' accounts and paragraph 5 defines how overall control should be exercised.
Rule 30 Transfers between client accounts within the same client bank account.
Rule 31 Executor, trustee or nominee companies.
Rule 32 contains the detailed requirements for accounting records; Rule 32 (6) Acting for both lender and borrower, a single client ledger account may be used.
Rule 33 shows the particular requirements for operating a clients' own bank account.
All records should, as a minimum, be written up weekly.
Three-way bank reconciliation - The basics of control are that the client cash book balance is reconciled to the bank every week and the client account ledger balances are agreed to the cash book.
Differences are immediately explained and corrected.
Part E - Monitoring and investigation by the SRA, rule 34
Any solicitor must produce client account and any other required information.
Part F - Accountants' reports, rules 35 to 49
Rule 35 It is the responsibility of any solicitor who has held client monies to provide an accountants report Rule 36 within a six month deadline of the year end or rule 35 - 2 as additionally required by the SRA. Exceptions are defined where a year may not be the appropriate time period. Rule 37 Accountants qualified to make the report are defined including the Association of Chartered Certified Accountants (ACCA). Rule 38 Engagement letter - There must be specific terms agreed in a letter of engagement. Rule 39 A change of accountant must be notified to the SRA by the solicitor. Rule 40 The main place for the accountant to examine the records must be the solicitors premises. Rule 41 the accountant requests a list of all bank accounts used in the practice; client, office and other.
Rule 42 defines test procedures designed to identify departures from any of the rules.
Rule 42 notes (i) the solicitor's own accounts need not be prepared or audited. However, Rule 42(i) and Rule 42(j) office ledgers and cash books are checked for permitted or erroneous client entries.
Rule 43 The accountant should be aware of SRA guidelines.
The practical implications
see also Checking - what we need and what we do
A sample size is determined by the accountants' assessment of the risks at the start of the work. This is likely to be 20% or more of the transactions on the client bank accounts and give rise to examination of the underlying ledger records and client files many of which will have been archived as being up to 18 months old. Samples are also selected from the office bank accounts.
Banks will be asked to confirm balances at two dates, with a standard bank confirmation letter, and provide a sample of paid cheques. This can lead to unhelpful delays in meeting the deadline, typically five weeks from receipt of the enquiry by the bank. We recommend that the examination is started within three months of the year end.
Rule 44 defines matters outside the accountant's remit; in principle that we are not required to pursue any investigations. Rule 45 deals with privileged documents; any withheld need to be detailed in The accountants report (AR1).
Rule 46 - Completion of checklist Appendix 4 - Reporting Accountant's Checklist
Summarises the work undertaken by the accountant and is sent by the accountant to the solicitor at the end of the work. It is not sent to the SRA but must be retained for production within three years.
Rule 47 - Form of accountant's report. The accountants report (AR1) is at Appendix 5. This gives basic information and the accountant reports any deviations from the rules or that none were found; a qualified report or unqualified report.
It is normally sent to the Information Directorate by the Accountant with a copy to the solicitors.
Rule 47 notes (iv) (v) and (vi) deal with trivial breaches which need not be reported.
It is expected that "... clerical and book-keeping errors will arise."
Trivial breaches involving significant client balance shortfalls on qualified Accountants reports (AR1) need to be explained.
Rule 48 Separate offices may have separate AR1 Accountant's reports and time periods.
Rule 49 SRA may waive provisions of Part F in particular cases. Waivers are in writing and "... must be extremely rare."
These are most likely to apply to Accountants' reports running late for the deadline and you may apply to the Information Directorate.
Part G - Commencement, rule 50
Rule 50 is the original commencement date 22nd July 1998.
- New solicitors accounts rules 2011 changes with effect from 6 October 2011 key changes are to be - with "old rule number" references see old to new rules layout and equivalents below:
- see old and new rules highlights pdf.
- Rule 1 Key principles restated.
- Rule 2(1) Notes to the rules classified into either binding or explanatory.
- Rule 6 Must appoint a compliance officer for finance and administration, COFA, who "... must report any material breaches of the accounts rules to the SRA as soon as reasonably practicable."
- Rule 15 Solicitors may not provide banking facilities for clients; emphasised.
- Rule 19 Electronic bank authorities and electronic client bills.
- May retain electronic copies of bank statements in place of paper copies.
- Rule 23 Required controls on withdrawals from the client accounts.
- Rules 24 to 27 Fair and reasonable interest must be paid; prescriptive details and tables repealed.
- Rule 32 Five weekly reconciliations on passbook designated client accounts - from fourteen weekly previously.
- Multi Disciplinary Practices MDP's: clarifying funds outside the scope of Solicitors' Accounts Rules SAR.
Significant previous amendments, included in the main notes above, have been:
In the case of Wood and Burdett (case number 8669/2002 filed on 13 January 2004), the Solicitors Disciplinary Tribunal said that it is not a proper part of a solicitor's everyday business or practice to operate a banking facility for third parties.
Solicitors' Accounts (Residual Client Account Balances) Amendment Rules 2008 - Left Over Balances came into effect from 14 July 2008.
Firm-based regulation and legal disciplinary practices as provided for in the Legal Services Act 2007 came into effect from 31 March 2009.
Appendix 2 - Special Situations - What Applies
Nine specific situations and what parts of the rules apply:
1 - Rule 16(1)(a) a/cs in solicitor's name (not client a/c)
2 - Rule 16(1)(b) a/cs in name of client - not operated by solicitor
3 - Rule 16(1)(b) a/cs in name of client - operated by solicitor
4 - Liquidators, trustees in bankruptcy and Court of Protection deputies
5 - Trustees of occupational pension schemes
6 - Joint accounts - rule 10
7 - Solicitor acting under power of attorney
8 - Solicitor operates client's own a/c e.g. under power of attorney - rule 11
9 - Exempt solicitors under rule 5
Appendix 1 - Flowchart: Effect of the Solicitors' Accounts Rules
Appendix 6 - Accountant's Report Form for overseas offices (AR2)
Index of terms - links approximately 900 terms and sub terms to the applicable rule. See also Rule 2 - Interpretation and other rules in "Part A - General" for fundamentals.
- New solicitors accounts rules 2011 changes with effect from 6 October 2011 - old to new rules layout and equivalents:
- Generally rule numbering is condensed to close gaps from rules previously repealed; numbers 8, 18 and 28.
- Part A - General
- Rules 1 to 7 are not renumbered but some are renamed.
- Rules 9 to 13 become 8 to 12.
- Part B - Client money and operation of a client account
- Rules 14 to 23 become 13 to 21.
- Part C - Interest
- Rules 24 to 27 become 22 to 25.
- Part D - Accounting systems and records
- Rules 29 to 33 become 26 to 30.
- Part E - Monitoring and investigation by the SRA
- Rule 34 becomes 31.
- Part F - Accountants' reports
- Rules 35 to 49 become 32 to 46.
- old Part G was Rule 50 the 1998 commencement - is reused and the 2011 commencement is in the new Part H.
- new Part G is Overseas practice - Rules 47 to 52.
- new Part H Transitional provisions is Rule 53.
- In the final version:
- Lettered headings have become equivalent numbered headings A is 1, B is 2 etc.
- There are no Transitional provisions:
- New rules are applicable for all transactions from 6 October 2011.
- A Preamble has been added.
- Proposed new part H (Part 8) Transitional provisions was deleted.
- The old parts A to F are now parts 1 to 7.
- The old rules 1 to 50 are now rules 1 to 52.
- Appendices are not renumbered but some are renamed:
- Appendix 2 - Special situations - What applies - has a new item: 10 - Non-SRA regulated activities of an MDP Multi Disciplinary Practices.