SRA publishes its evaluation on client money reforms
The Solicitors Regulation Authority (SRA)’s recent evaluation of phases one and two of its accounts rules reforms has been an interesting read, detailing the positive effects of the changes following their implementation from November 2014 onwards. Phase three of the changes is still subject to formal approval from the Legal Services Board and no implementation date has been announced as yet, although we do know that it will not be before 2019 as opposed to the Autumn 2018 date which was previously anticipated. The changes have been on the agenda for some time now so it is worth having a recap on each phase:
Phase one – implemented 1 November 2014
- Removed the need for unqualified reports to be submitted to the SRA
- An exemption was introduced for firms 100% funded by legal aid
Phase two – implemented 1 November 2015
- More emphasis on reporting accountant’s professional judgement
- Exemptions introduced for firms holding an average client balance less than £10,000 and a maximum of £250,000.
The SRA report details that they are receiving fewer qualified reports as a result of these changes and that, as a result, a greater percentage of the reports are being investigated, increasing from 1.6% in 2015 to 13.1% in 2017.
Due to the fact that fewer reports are being qualified as a result of reporting accountants being able to use their professional judgement, people tend to take any qualification more seriously than before, and want to engage with their accountants to improve their systems and controls as a result.
Whilst it is encouraging to see that there has been a positive response to phases one and two being rolled out, the most fundamental of the changes are yet to be implemented in phase three, being:
- A change in the definition of client money
Many firms will continue to operate a client account but those where the only client money they receive relates to fees and disbursement may take advantage of an exemption.
- Setting out the SRA’s approach to Third Party Managed Accounts
This provides an option for firms that do not wish to hold client money.
- A less prescriptive and restrictive set of rules
The rules have been reduced from over 40 to 7 pages, allowing more flexibility for firms as to how they choose to comply. However, there is more of a requirement for a strong set of recorded systems and controls.
When compared to the first two, phase three will have much more far-reaching implications to solicitor firms on a day-to-day basis, particularly to those firms that only hold client money for fees and disbursements. Therefore, it would be beneficial for all firms to keep up to date with the latest client money developments in order to ensure that they have appropriate systems and controls in place ahead of implementation. Hopefully, if this is the case, the evaluation of phase three will be as positive as for phases one and two.
Kreston Reeves have a specialist client money team that can help you. For further information on the above, please speak with Max Masters using the contact details here.
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