Legal money: how law firm accounting is changing
The third and final phase of the Solicitors Regulation Authority’s (SRA) review of the Account Rules was issued in June 2016. This follows phase one, which made minor alterations to the structure of the annual accountant’s report, bringing in exemptions in the need to obtain a report for specific firms and removing the requirement to send unqualified reports to the SRA.
Implemented in November 2015, the second phase increased exemption from the requirement to obtain a report to firms with an average client base of £10,000 or less and a maximum balance of £250,000 during the accounting period, encouraged an ‘outcomes-based’ method for reporting accountants when assessing compliance with rules, and increased focus on risks to client money.
June’s consultation, entitled ‘Looking to the Future: SRA Accounts Rules Overview’, delivered phase three. This concluding phase focuses on the wider scope of existing Accounts Rules, offering proposals for greater change. There is recognition by the SRA that the current Accounts Rules have remained unchanged for a number of years, have a focus upon making sure all law firms manage their finances in the same manner, and are now both restrictive and unhelpfully rigid. As such, the SRA have reached the conclusion that the Accounts Rules would not pass were they assessed against better regulation principles.
The SRA has also recognised that the existing Accounts Rules are overly complex, and that this makes it hard for consumers to comprehend what will happen when their money is handled by a firm, as well as creating difficulty for those who have recently begun a career in law to know what they need to do.
The simplifications suggested by the SRA place a focus on the fundamental principles and conditions surrounding client money being kept safe, including keeping client money and firm money separate, and ensuring the prompt return of client money when matters have concluded. Other proposed changes include a significant reduction of the Accounts Rules from the current thirty-two pages down to six, updated definitions of ‘client money’ and ‘client liability’, changes to the rules surrounding disbursements, and the way in which client accounts can be used for other payments.
The third phase consultation is open for comment until 21st September 2016. If all goes as expected, the SRA is planning to issue the new Account Rules in March or April of 2017.