Practical changes to the rules

Client account transfers against disbursements

Under the new rules, 2.1 (d) outlines that client money is defined as for “fees and any unpaid disbursements if held or received prior to delivery of a bill for the same.

This is interpreted that transfers should no longer be made from client account, directly against disbursements on the office account. A disbursement only bill should be raised and funds transferred from client account against that bill.

Our advice – We would advise that a disbursement only bill is raised for transfers of this nature. This has always been our advice to comply with VAT requirements.

Funds on account of costs and disbursements may be held in office account

Rule 2.2 defines that where the “only client money you hold or receive” is for fees and disbursements and 2.2(b) “you do not for any other reason maintain a client account” that “you are not required to hold this money in a client account if you have informed your client in advance of where and how the money will be held”.

Essentially this means that firms that only hold client money on account of fees may no longer need to operate a client account and may hold this money in office account. However this does conflict with rule 4.1 which states that “you keep client money separate from money belonging to the authorised body”.

Our advice – Most Practice Management Systems are not capable of recording monies on account on the office ledger and would make it difficult to identify office credit balances. We would not recommend utilising this option.

Third party managed accounts

The new rules, 11.1, outline that Third Party Managed Accounts may be used, rather than using a traditional client account if the use of the account does not result in “you holding the clients’ money” and you inform the client of the arrangement.

Our advice – Currently we are aware of one provider – Shieldpay. Services are still being developed and until seen in practice, we would recommend avoiding until further tested.

The term “office money” is removed

The new rules only refer to “client money” and the protection of client money. This means that a number of rules relating to the office account have been removed or amended.

Under the new rules the concept of unpaid or incurred disbursements has been removed, meaning disbursements are only to be considered as disbursements when paid.


Previous rules had strict timescales for undertaking tasks such as:

  • Payment of unpaid, billed disbursements by the second working day of receipt (or transfer to client account)
  • Transfer of earmarked costs from client account within 14 days
  • Residual balances should be communicated to clients every 12 months

These timescales have been removed in the new rules and replaced by “promptly”.

Our advice – Firms need to define “promptly”. In practice most firms are likely to stick to current timescales. This will however need to be defined in each firms policies and procedures.

Suspense accounts & “fixed fee payment” accounts

Rule 8.1 of the new rules identify that ledgers should be identified by “the client’s name and an appropriate description of the matter to which they relate”.

Under the ethics guidance, “helping you keep accurate client accounting records”, the guidance outlines that “ledger accounts should include the name of the client or other person or trust for whom the money is held and containing a description of the matter or transaction”.

This is further evidenced under ethics guidance “planning for and completing an accountants report” which lists reasons for qualifying an Accountants Report may include “ledgers failing to include reference to a client). Further the reason “improper use of suspense accounts” may lead to qualifying a report.

Our advice – The above would indicate that suspense accounts and other generic client/matters should not be used. Individual client/matters should be set up for each client/matter, including where fixed fees are received for initial meetings.

Accountants’ reports

There are a number of changes relating to Accountant’s reports. A report is not required per 12.2 if:

  • All money held is from the LAA
  • In the accounting period the statement balance does not exceed (1) an average of £10,000 (2) a maximum of £250,000

Continued focuses of the rules

Providing banking facilities

Rule 3.3 reaffirms that all receipts, payments and transfers should be “in respect of the delivery by you of regulated services”.

There have been a number of recent SDT cases involving using the client account as a banking facility and the rules still focus on not providing banking facilities to clients.

Residual balances

Rule 2.5 ensures “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”.

This is viewed as a high risk area that the SRA will continue to monitor. The new rules advise that money is returned “promptly” and firms will need to define their view of promptly and document their process for dealing with residual balances.

Bank reconciliations

Rule 8.3 maintains that at least every five weeks a bank reconciliation must be undertaken which is signed by the COFA.

What you need to do (now)

Define promptly

Firms need to look at current timescales for undertaking processes and deciding if (a) to continue using them or (b) depart from them. If departing from them, firms will need to justify why. These include:

  • Banking of client monies
  • Payment of unpaid disbursements
  • Transfers from client – office account
  • Dealing with residual client account balances

Ensure policies and procedures are documented

Each firm will need to detail its policies and procedures. An accounts manual is required if not already in place.

Due to the removal of prescribed rules, the appointed reporting Accountant will need a specified set of policies and procedures to assess the Accountant’s report against.

This includes defining timescales for “promptly” as above.

The guidance notes detailed in “helping you keep accurate client accounting records” require:

  • “Controls are in place for identifying client money, including cash, when received by the firm” “you should have a clear system or process in place to achieve this”
  • “You should have clear procedures for ensuring that all withdrawals from client account are properly authorised”
  • “Persons nominated to authorise payments. That person should ensure that there is evidence which supports the reason for each payment”
  • “Procedures for ensuring that sufficient money is held for a particular client before any withdrawals are made for that client”
  • “Systems for the transfer of costs from a client to a business account”
  • “Systems which help to control and record accurately any transfers between different clients of the firm”
  • “Checks and controls to make sure client files are closed promptly and the prompt payment back to clients of any residual balances”
  • “Systems which make sure clients… are kept regularly informed when funds are retained for a specified reason.. at the end of a matter or the substantial conclusion of a matter”
  • “Most firms will be operating computerised client accounts. If you do, you will want to make sure that you have clear policies, systems and procedures which set out access controls and visibility”

Consider the use of the client account

Do you hold client money other than on account of fees and disbursements? Do you need a client account and accountants report?

What you need to do after 25th Nov 19


Bank reconciliations

Ensure that you review and sign the bank reconciliations every 5 weeks.

Ensure that you understand the bank reconciliations and that any unreconciled items are queried and uncashed cheques are reviewed and cancelled.

Residual balances

Review aged client account balances on a regular basis with fee earners and ensure that attempts are made to return residual client account balances.

COFA Review

Review bank reconciliations including unreconciled or uncleared items and challenge them monthly.

Review debit client account balances and office credit balances.

Undertake a review of compliance with the Solicitors Accounts Rules, policies and procedures per the items listed in Planning for and completing an accountants report

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