COLPs Supplement | Complying with the accounts rules

The SRA Accounts Rules 2011 took effect on 6 October 2011 with the rest of the Handbook, in place of the former Solicitors Accounts Rules 1998. The 2011 Rules are divided into eight parts and largely follow the 1998 Rules. The guidance notes that are to be found in the 2011 Rules are not mandatory (Rule 2.1) in contrast to the 1998 Rules.

COFAs may have a more limited remit than their COLP counterparts (where the roles are not covered by the same individual) but it is worth bearing in mind that breaches of the Accounts Rules accounted for a third of the cases to come before the Solicitors Disciplinary Tribunal SDT in 2010/2011. Such breaches are often coupled with an allegation of dishonesty when connected to improper withdrawals from client account.

It is also worth mentioning that the Accounts Rules do remain precisely that – rules. The Code of Conduct may have been adapted to outcomes and indicative behaviours, but there is less leeway for interpretation in this area of the Handbook and the position therefore remains as stated by Lord Chief Justice Bingham in the case of Weston v Law Society (1998) Times, 15 July, that solicitors are “under a heavy obligation, quite distinct from their duty to act honestly, to ensure observance of ?the rules”.

1. Proper accounting systems – Rule 29

It is essential that all accounting records are kept properly kept up to date, though it has to be accepted that errors can be made even in the best run practices. An effective control is the requirement for the bank reconciliation of the client account as per Rule 29.12 which should be completed at least once every five weeks. The reconciliation is a three-way review comparing the individual client ledgers with the client cashbook and the balances on the bank statements. If there is a difference it must be investigated immediately and corrected, especially if there is a shortage on client account.

Best practice dictates that the reconciliations should be signed off by a partner and if there is a difference the accounts staff should investigate and report back to the partner. It should not be left until the next month for further mistakes to accumulate. The exercise should be given priority. Although the 2011 Rules do not specify that the reconciliation statement should be signed off by a partner, paragraph 5.4 (5) Appendix 3 to the 2011 Rules refers to a manager or COFA checking the reconciliation statement and taking any corrective action.

Rule 29 should be seen as key to maintaining reliable and compliant accounts. It follows that this will be a core duty of most COFAs. Late or inaccurate postings can lead to solicitors paying out more from client account on a client’s behalf than is being held, resulting in an obvious shortage on client account.

2. Withdrawals from client account – Rules 20 and 21

Under rule 21 of the 2011 Rules there is greater freedom for firms to authorise who may sanction a withdrawal from client account. The firm will obviously take great care in any changes that it does make to such arrangements and will need to put in place suitable systems to ensure compliance, including monitoring checks.

The categories of withdrawals from client account are strictly set out Rule 20. Often an improper withdrawal from client account is coupled to an allegation of dishonesty, especially where there is no justifiable reason for the payment to be made to office account. In Slocombe (SDT 10706-2011), for example, a payment of personal tax of over £33,000 had been paid direct from client account to HMRC. Round sum transfers for costs from client account to office account without supporting invoices is another sign of non-compliance, as are payments of rent, PAYE and salaries when the office account is well overdrawn.

3. Use of client account – Rule 14(3)

Under the 1998 Rules there was a mandatory guidance note to Rule 15 that the client account was not to be used as a banking facility for clients. This was introduced following the case of Wood & Burdett (SDT 8669-2003). This is now elevated to a rule. Where a client instructs a firm to retain post-completion funds for a very short period pending acquisition of another property the position must be actively monitored to ensure that the funds are not forgotten. Operating what is, in effect, a banking facility for the client is not only a breach of the Accounts Rules but is also quite possibly an offence under the Financial Services and Markets Act 2000.

Some serious breaches of this provision to have come to the SDT of late have involved solicitors who have not only held sums in client account for long periods of time but have also then made payments on the client’s behalf to credit card companies, insurers, and others. Where this is done to avoid detection by HMRC and/or the divorce courts this may well amount to fraud or the perversion of justice by the solicitor, almost certainly justifying the most serious penalties open to the tribunal.

This kind of malpractice should not be confused, however, with those who manage the affairs of elderly or disabled clients and who will be making payments such as those described above on a perfectly justifiable and professional basis. Here the retainer should spell out precisely why client funds are being administered in this way to avoid any confusion on the issue at any investigation.

4. Professional disbursements – Rule 17(1)

Professional disbursements are defined as counsel’s fees or expert fees and will also include interpreters, process servers and other such agencies. Firms are entitled to bill clients for costs and disbursements including professional disbursements that are yet “to be paid”.

When the bill is paid the whole sum can be paid into office account provided that the sum relating to unpaid professional disbursements is paid either into client account or to the professionals entitled to the money “by the end of the second working day following receipt i.e. within ?48 hours”. If this is not done, the whole sum may be paid into client account and the part of the payment which is office money transferred to office account within 14 days.

A problem arises when the whole sum is credited to office account and there is a delay in the disbursements being paid to the professionals. The office account overdraft then benefits from receipt of the unpaid professional disbursements. Firms must therefore ensure that when bills are paid careful attention is given to any disbursements which have not yet been paid and these should be paid out within ?48 hours.

5. Transfer of costs – Rule 17(2)

Firms regularly hold monies paid on account of costs in their client account and completely in accordance with the rules. However, when the work has been completed and the time comes to bill the client, problems can arise. It is often forgotten that the monies still belong to the client and cannot be transferred to office account unless and until a bill or other written notification of costs has been sent to the client as per Rule 17(2). If the funds are transferred in breach of this provision a shortage on client account can arise.

The tribunal has dealt with many cases where firms have “tidied up” old balances on client account and transferred the balances from client to office account, particularly where fee earners have left and no-one has checked their files. These balances could have arisen for a multitude of reasons, for example, refund of Land Registry fees; accidental overpayment of costs by client; or refund of service charges. The monies do, of course, belong to the client and not the solicitor. Issuing ‘dummy’ or internal bills which are never sent to the client and which do not relate to any work that has actually been undertaken will be regarded as being ‘akin to theft’ and has, in some cases involving larger amounts, resulted in strikings-off.
There are, of course, numerous other problems that will arise in firms from time to time that will have to be acknowledged to be non-compliances by the COFA and recorded as such. The duty to act with integrity (Principle 2) is at its most marked when handling client monies and breaches that amount to “serious misconduct” under Outcome 10(4) of the Code of Conduct or “material breaches” under the Authorisation Rules may well be more commonplace for COFA than COLP.

A more detailed version of this article is available to Colpline subscribers on the secure part of the Colpline website. ?www.clt.co.uk/colpline