Practice management | Shifting the balance on residual client accounts

The new year marked the official start date of two new posts – compliance officers for legal practice (COLP) and compliance officers for finance and administration (COFA). Introduced as part of the Solicitors Regulation Authority’s (SRA) efforts to shift the focus towards outcomes-focused regulation (OFR), the compliance officers’ positions intend to improve accountability and enhance services to clients. COLPs and COFAs are set to play a pivotal role in creating a culture of compliance across the entire sector, ensuring the necessary processes are not just put in place so that firms fulfil all the statutory terms, conditions and regulatory requirements in the SRA’s handbook – all 570 plus pages of it – but that all staff, including senior managers and partners, are aware of, and also follow, the procedures.

One of the many areas where the new compliance officers will have to pay particularly close attention relates to the handling of residual client balances, as outlined in the Solicitors’ Accounts Rules. COFAs in particular have specific responsibility for ensuring compliance with account rules, including rule 20 which relates to the withdrawal of funds from client accounts. For many, this may not feel like the most pressing issue the industry faces, but how to handle residual client balances – money that belongs to a client – is a continual cause of concern and frustration for many firms.

The accounts rules state that if a legal firm makes all reasonable efforts to trace a client to return their money, but the individual still cannot be found, the funds can be donated to charity. For sums less than £50, practices can self-certificate before donating, while for larger amounts, authorisation must first be obtained from the SRA. In both scenarios though, what often appears at first glance to be a simple administrative process can actually become a frustratingly time-consuming and difficult task.

Taking ‘all reasonable steps’ to find the relevant person could involve telephoning several numbers, writing letters to various addresses, checking electoral rolls for necessary information, and liaising with banks, building societies, and even the Department of Work and Pensions to try and obtain the required details. This in itself is obviously a very time-consuming process, but practices also need to factor in the requirement to evidence all these steps to ensure final sign-off from the SRA. All this administrative work has traditionally been carried out manually, either through masses of paper trails or staff inputting information into spreadsheets and client management software. This type of approach can lead to inefficiencies as it can be difficult to manage the workflow which is exactly the function that bespoke software provides. With historic legacies, these issues are of course exacerbated with practices having to tackle more fundamental issues such as whether the client has moved address or whether the original fee-earner has moved to a different practice.

It seems evident that without a more systematic approach to manage multiple clients at all stages of the process – and to document the efforts taken to trace these clients – residual client balances will continue to remain a troublesome, time-consuming task. The SRA has told us that many legal practices were still getting in touch with them for advice on the matter, and numerous solicitors’ firms of various sizes around the country indicated that many of them too had significant residual balances to address, both in terms of the number of clients to contact and the size of the balances concerned.

In response to this changing regulatory environment, an increasing number of new products have entered the market to help practices better manage their regulatory obligations, with the increasing acceptance of cloud-based software helping to make these products more accessible and cost-effective for many practices. Many of these new products seek to improve the process of organising the collection and reporting of information relating to compliance.

Examples of software such as Riliance are helping firms to meet their regulatory obligations through the coordination and organisation of many different streams of compliance that run through a practice (for example, money laundering, file reviews and complaints).

Wellmeadow developed an online workflow system that automates various steps of the residual client balance tracking process (such as an in-built letter sending function) and provides timely prompts with regard to the next action that needs to be taken for a particular client (perhaps a follow-up phone call).

The use of bespoke software offers a more systematic approach to information management which offers great advantages in efficiencies over traditional paper-based methods or by having multiple spreadsheets containing bits and pieces of information. In many practices, especially smaller firms, the person taking on the new role of COLP or COFA will also be a fee-earner, so using technology to cut some of the administrative tasks they are currently required to undertake can free up more time for fee-earning. Using a computerised workflow system also offers practices much greater overall control in terms of reporting and auditing – a ready-made system is there to store and organise data, while all actions and responses are automatically logged, providing immediate access to an accurate audit trail which makes evidencing compliance with their regulatory obligations a far less daunting task.

Of course, it’s probably fair to admit that the legal profession hasn’t always enjoyed the reputation for being a sector that is quick to embrace technological advances, so many will wonder if such a system is suitable for them.

Likewise, with respect to other areas of compliance, practices will need to consider how technology and information systems can be used to achieve better working practices that engender an increased engagement with a compliance culture.

In the first instance, practices – led by the COLP or COFA – need to review their current processes for managing and reviewing their compliance information and establish how they are working, and whether technology could help improve overall efficiency. It may be that for smaller practices in particular, improved in-house solutions could be introduced, such as changing from a paper-based trail to a simple spreadsheet. For others, an off-the-shelf software package may suffice, while for others, a more bespoke technological solution may be required. With all of these options, there will be a varying degree of associated cost, plus the time needed to design, implement and communicate standard operating procedures to ensure that the technology is appropriately integrated into the day-to-day operations of the practice. These short-term pains will hopefully be offset by the longer term gains in overall efficiency that using such software will lead to. In particular, where cloud-based software is adopted, they can often be a very cost-effective solution, while obviously offering the advantage of business continuity, as a practice’s data can be accessed from anywhere by the relevant staff. It is worth noting that the potential risks relating to data security associated with using cloud-based software should be considered and managed by practices that seek to use these services.

Having robust procedures in place to deal with issues such as residual client balances demonstrates that a practice takes wider compliance and risk management seriously. Not only does this improve day-to-day practice efficiency, but it also brings about wider benefits. Demonstration of compliance is one of the key factors in practices achieving certification such as the Specialist Quality Mark for legal aid or Lexcel’s practice management standard. Such quality marks are becoming increasingly recognised by the public – and consequently becoming a much more important factor taken into consideration when choosing a solicitor – while evidence of a rigorous approach to compliance can even help practices get better deals on their professional indemnity insurance renewals.

In such an environment, where these issues are becoming increasingly important to the day-to-day operations of a legal practice, compliance software will play an increasing role in helping to manage regulatory obligations. Streamlining the system of handling residual client balances in an effective and efficient way will hopefully play a part in empowering COLPs and COFAs to create a greater culture of compliance throughout the wider legal industry, and we look forward to working alongside them in the months to come.