May 27th, 2014 / Insight posted in Articles

Proposal for law firms to self-regulate on client funds

At the current time every law firm that holds client monies must submit an annual accountant’s report to the SRA.  The report considers whether the SRA’s rules for the operation of the client accounts have been adhered to and, where there are breaches, how and when they have been corrected.  A consultation process is underway that proposes removing the mandatory requirement that firms must submit an annual accountant’s report to the SRA, to be replaced by a self-regulated declaration.  The proposal is that every COFA (Compliance Officer for Finance and Administration) will make a declaration when they prepare the renewal application for annual Practising Certificates.

Where the SRA consider that a firm poses a higher than normal risk to client money they may require the Practice to have their client accounts audited, as part of an investigative or supervisory process.

If the consultation is positive the changes will be likely to be implemented in October 2014.

So what are the implications of such a proposal for legal practices and for their clients

Currently, regardless as to whether a firm represents a low or a high risk in terms of handling client money, they must engage an auditor to assess and test their systems and controls over their client accounts.  Any discrepancies between the operation of the client account and the SRA Accounts Rules are reported by the auditor.

Errors in the handling of client money can occur not only because of fraud or deliberate actions but due to a simple lack of understanding, pressures of work, etc.  This report acts as a mechanism to not only flag issues occurring in the system for handling client money to the SRA but for the Practice itself.

The proposal places an additional, and for many Practices a significant new responsibility on the COFA, to confirm adherence to the regulations.  Without the benefit of a third party, independent review the COFA will need to ensure that their confirmation is based on reasonable evidence and enquiry.  Essentially they will need to ensure that, if required, they can demonstrate that they made all reasonable enquiries to enable them to make the statement.

For clients of legal practices they will have lost the safeguard that during the year an independent ‘pair of eyes’ will be looking at the operation of the accounts which hold their money.

Legal firms are under financial pressure and the proposed abolition will no doubt be welcomed – potentially saving around £30m a year for law firms and £200k for the regulators who will no longer need to process the reports.

Whilst the cost savings are to be welcomed the true cost of self-regulation is likely only to become apparent over time.  If the removal of the independent review process leads to additional claims from clients the regulator may find that costs, related to investigation and settlement, rise.

The consultation period closes on 18 June 2014.  Any proposed changes are likely to come into effect at the same time as the new Lexcel v5 is launched at the end of October 2014.