Regulatory and Compliance Training & Consultancy

Residual Client Ledger Balances and the COFAs Reporting Obligations

January 2017

The existence of residual client ledger balances can present very real problems for the firm's Compliance Officer for Finance and Administration (COFA). One of the most common questions that arises during our COFA Masterclass is, at what point does the existence of residual client ledger balances within a firm become a reportable breach? In this article subject expert, Richard Lane, considers the issues involved.

SRA Accounts Rules 2011

Rule 14.3 of the SRA Accounts Rules 2011, provides that client money must be returned to the client (or other person on whose behalf the money is held) promptly, as soon as there is no longer any proper reason to retain those funds.

Until recently, the only real debate concerning residual client ledger balances was how should the word ‘promptly’ be interpreted in the context of this rule. The approach adopted within the SRA Accounts Rules 2011 is not particularly helpful. The notes to the SRA Accounts Rules 2011 reflect that the word ‘promptly’ is not defined in relation to the rules governing residual client ledger balances, but should be given its natural meaning in the particular circumstances. Historically, the lack of clarity surrounding the word ‘promptly’ has led to a great deal of uncertainty amongst Compliance Officers for Finance and Administration (COFAs) and legal cashiers as to exactly what the Solicitors Regulation Authority's expectations are in respect of residual client ledger balances.

Fortunately, the SRA has given what is possibly the clearest indication yet of what they expect from those acting as a COFA in a guidance document entitled, ‘SRA’s Guidance to Reporting Accountants and firms on planning and completion of the annual Accountant‘s Reports, under Rule 32 of the SRA Accounts Rules 2011’. This document accompanied the introduction of version 15 of the SRA Accounts Rules 2011 in November 2015 and is designed to assist Reporting Accountants to decide when they should be qualifying their Accountant's Report.

So far as residual client ledger balances are concerned, the SRA suggest that in a well-run firm, any monies held on a client ledger at the completion of the matter will be returned to the client, thus, the presence of residual client balances at any one time will be rare.

In a firm with adequate procedures, residual client balances are returned to clients, although, this can take up to 90 days. Residual client balances do exist at any one time; however, the finance team are aware of all of these and are in the process of returning the funds or are dealing with them in accordance with Rules 20.1 (k) and/or Rule 20.2 of the SRA Accounts Rules 2011.

How does your firm measure up to these exacting standards? Do you have residual client ledger balances, the presence of which ought to be reported to the SRA?

SRA Authorisation Rules 2011

Rule 8.5 of the SRA Authorisation Rules 2011, imposes an obligation on the Compliance Officer for Finance and Administration (COFA) within an authorised body to:

• record any failure to comply with the SRA Accounts Rules 2011 and to make such records available to the SRA on request; and

• to report, as soon as reasonably practicable, to the SRA any material failure so to comply.

Within an Alternative Business Structure (ABS), the obligation is more stringent as the Compliance Officer for Finance and Administration (COFA) of a licensed body is also required to report non-material failures to the SRA, although these can be reported to the Solicitors Regulation Authority on an annual basis.

The question arising is at what point does the presence of residual client ledger balances represent a material breach of the SRA Accounts Rules 2011? The answer, unfortunately, is probably a lot sooner than most people think. Frequently, the residual client ledger balances which arise in most firms tend to be modest in amount, varying from a few pounds but rarely exceeding a couple of hundred pounds. All too often, the thought process adopted by the Compliance Officer for Finance and Administration (COFA) leads to the conclusion that the existence of small residual client ledger balances would not be considered a material breach of the SRA Accounts Rules 2011 and, therefore, not reportable to the Solicitors Regulation Authority unless arising within an Alternative Business Structure (ABS). This is not the case. A material breach is not necessarily about the amount of money involved, repeated or systematic breaches of the SRA Accounts Rules 2011 will also be considered to be material breaches by the Solicitors Regulation Authority. It is clear from the details of the regulatory settlements published on the SRA website that there is an expectation on the part of the Solicitors Regulation Authority that such breaches in respect of residual client ledger balances should be reported to them as a material breach of the SRA Accounts Rules 2011. Perusal of the published regulatory settlements reveals numerous examples of solicitors falling foul of the Solicitors Regulation Authority and picking up fines for failing to report material breaches of SRA Accounts Rules 2011 including, inter alia, the existence of reasonably modest levels of residual client ledger balances. Similarly, a review of the Findings published by the Solicitors Disciplinary Tribunal (SDT) demonstrates a much greater emphasis being placed on the role of the nominated Compliance Officer for Finance and Administration (COFA) in relation to cases involving breaches of the SRA Accounts Rules 2011.

At Legal Finance Professionals Limited, we have the knowledge and experience to help you solve your residual client ledger balances problems and to avoid them arising in the future. Attendance at one of our forthcoming residual client ledger balances workshops will help to understand fully the issues and possible solutions. Our bespoke in-house SRA Accounts Rules training courses for both fee earners and finance staff can really help to concentrate employees' attention on the importance of avoiding residual client ledger balances arising in the first instance. If you have a problem with existing old residual client ledger balances which you are struggling to tackle, why not let us resolve the problem for you? Our residual client ledger balance clearance service may be just what you need. If, at this stage, you just require some further information, we have published a guidance document entitled, Dealing with Residual Client Balances under the SRA Accounts Rules 2011 which has proven to be very popular and provides advice on how to tackle your residual client ledger balances. Finally, our COLP & COFA Support Service provides support to compliance officers on all compliance issues relating to both the SRA Accounts Rules 2011 and the SRA Code of Conduct 2011, including help with deciding which breaches need to be reported to the Solicitors Regulation Authority.

If you would like to discuss residual client ledger balances problems or other SRA Accounts Rules 2011 issues, please contact Richard Lane on 0330 223 5346 for a confidential discussion.

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