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SRA Accounts Rules 2017 Summary of Changes

June 2016

UPDATE: SRA Accounts Rules No Changes Before 2018 at the Earliest

UPDATE: Draft SRA Accounts Rules 2018 Published

On 1 June 2016, the Solicitors Regulation Authority (SRA) launched the consultation process for Phase Three of their review of the SRA Accounts Rules 2011 which is expected to lead to the publication of the SRA Accounts Rules 2017 in March or April 2017, assuming that the consultation process goes smoothly.

The draft version of the SRA Accounts Rules 2017 and accompanying documentation which forms the SRA‘s consultation makes for interesting reading. This news update is intended to be a ’first-glance‘ summary of the proposed changes to the SRA Accounts Rules. A more detailed examination of the SRA’s proposals for the SRA Accounts Rules 2017 will follow in due course.

What's Changing?

In our analysis, by far and away the most significant of the changes proposed by the SRA for the SRA Accounts Rules 2017, for the majority of solicitors' firms and Alternative Business Structures (ABS), will be the changes relating to the handling of monies received to pay disbursements and monies received from clients for costs, particularly when paid in advance.

Treatment of Disbursements under the SRA Accounts Rules 2017

Under the current version of the SRA Accounts Rules, monies received for unpaid professional disbursements are caught by the definition of clients‘ money and must, unless covered by the limited exemption provided under Rule 17.1(b), be paid into a client bank account and held there until the disbursement is discharged. The SRA propose that, under the SRA Accounts Rules 2017, where the firm is responsible for discharging the disbursement, for example, Counsels’ Fees or Medical Report Fees, monies received from the client or third party would not be considered to be clients‘ money and should, therefore, be paid directly into the business account (the new description for an office account). Monies received for disbursements where the client is liable for payment, such as Stamp Duty Land Tax or Estate Agents fees on the sale of a property, would continue to be treated as clients’ money and paid into the firm's client bank account, as is presently the case, until discharged.

Comment: Whilst this is a proposal which will be welcomed by many firms, particularly those involved in litigation work, for the obvious boost to the firm‘s cash flow that such a change in the rules will bring, it is not without risk. There can be no doubt, that both consumers of legal services and the experts used by solicitors and ABS’s will be exposed to higher levels of risk as a result of these changes.

Treatment of Monies Received for Costs under the SRA Accounts Rules 2017

The other significant change proposed by the SRA, in the consultation on the new SRA Accounts Rules 2017, is in relation to the treatment of the monies received for costs. Under the current SRA Accounts Rules, a payment on account of costs is caught by the definition of clients‘ money and must be paid into a client bank account and held there until the work has been done and a bill of costs for that work has been sent to the client. One of the key changes in the SRA Accounts Rules 2017 proposed by the SRA is to exclude payments on account of costs from the definition of clients’ money, meaning that they must be paid into the firm's business account in the same way that an agreed fee, is under Rule 17.5 of the SRA Accounts Rules 2011.

Comment: Again, this is another proposal which most firms will welcome, as it will improve cash flow, however, as before, such a change to the SRA Accounts Rules is not without risk and will afford less protection to consumers of legal services. It is very interesting to read in the consultation document that the SRA take the view that those risks would be mitigated by encouraging clients to pay for legal services by using a credit card, to take advantage of the protection offered under Section 75 of the Consumer Credit Act 1974 for purchases between £100 and £30,000. Of course, the emphasis is on the use of a credit card rather than a debit card as the latter does not offer the same protection to the consumer.

Restricting the Use of a Client Bank Account

In the SRA Accounts Rules 2017 consultation document, the SRA raise the question of allowing non-client money to be paid into a firm‘s client bank account but conclude that they prefer to retain the present situation where only clients’ money can be held in a client account.

Comment: In some circumstances, this could create a problem for clients in relation to the proposed new treatment of monies received for professional disbursements. As the SRA Accounts Rules currently stand, qualifying disbursements for VAT purposes can be paid from client bank account and the cost is then simply passed on to the client without having to add VAT. If the new SRA Accounts Rules 2017 are published in the draft form and firms are forced to deal with unpaid professional disbursements through their business account as an office liability, they will have no choice but to recover the input VAT on disbursements and then add output VAT when invoicing clients. This will have the effect of increasing the cost to the client by 20% where the supplier in question is not registered for VAT, as is often the case when instructing Junior Counsel or Medical Experts.

Payments from the Legal Aid Agency

The SRA are proposing to remove altogether the provisions which are presently in place to deal with payments received from the Legal Aid Agency (LAA) in the new SRA Accounts Rules 2017.

Comment: It is not clear how this would affect firms when monies are recovered from a third party on behalf of the client and the LAA has funded some or all of the costs during the life of the matter. Under the current SRA Accounts Rules, monies which are due to be recouped by the LAA must be held on client bank account until the firm receives notification from the LAA that recoupment has taken place. It is far from clear how the SRA expect recoupment to be treated under the SRA Accounts Rules 2017.

What Next?

We would urge as many readers as possible to take an active part in the consultation process, you can access the consultation documentation using the links below:

Accounts Rules consultation (PDF 21 pages, 263K)
Accounts Rules consultation annexes (PDF 34 pages, 375K)
Accounts Rules initial impact assessment (PDF 10 pages 169K)
Accounts Rules about you form (DOC 4 pages 142K)
Accounts Rules consultation questionnaire (DOC 15 pages 144K)

If you would like us to keep you updated on the latest legal regulatory and compliance news, including the latest developments relating to both the SRA Accounts Rules 2011 or the two new SRA Code of Conduct, sign up for our FREE newsletter.

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