November 20th, 2019 / Insight posted in Blog

COFA: Residual balances

On 10 October 2019 the SRA issued their statement of prescribed circumstances which sets out the treatment to be applied to residual balances held by law firms which cannot be returned to the client at the end of a matter. This statement states that residual balances can continue to be treated in accordance with the 2011 Rules, as was widely expected.

However, what is clear from the 2019 Rules and the guidance issued by the SRA in July 2019 is that the SRA does not envisage situations where law firms will be holding residual balances for significant periods of time. The issued guidance indicates that best practice will be for law firms to return funds to clients within 30 days of completion of a matter. They consider it adequate for funds to be returned within 90 days, as long as there is a system in place to regularly review balances and take action as required. In reality there may be situations where it is necessary to retain funds on behalf of a client. In these instances we would expect there to be clear documentation that there has been correspondence with the client regarding the balance and the reasons for retaining the funds.

We would then expect the firm to have a procedure in place to monitor this on an ongoing basis, as the SRA’s guidance on 4 July 2019 made it clear that they do not expect residual balances to arise frequently. What firms need to avoid is the perception that residual balances are not significant, either in themselves or cumulatively, and that there is no effective system in place for complying with Rule 2.5, as this may result in a qualified Accountant’s Report.

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