All law firms should ideally have some form of office manual detailing the policies, controls and processes which have been agreed internally and which cover all operating aspects of the practice. The office manual is the law firm’s internal handbook for its staff and principles. It is a vital document to assist with areas such as compliance, quality-assurance accreditations and LAA-contract requirements. It is also a very effective tool for risk management and training, providing that those who need to be aware of its contents adhere to it and find it easily accessible and well communicated.
The office manual needs to be tailored to each individual firm according to its size and complexity.
What are the COFA’s responsibilities within the office manual?
COFAs are responsible for the financial controls and processes which ensure the practice runs smoothly and client money is safeguarded. These responsibilities are still contained within the new regulatory reforms.
However, as well as formulating the required controls and processes, COFAs also need to ensure they are applied effectively throughout the practice. The office manual can be a very effective tool in assisting them meet their obligations.
The SRA has recently issued guidance notes to support the new rules relating to those accounting systems and procedures: these can be used as a guide for the contents of the office manual in this area. However, these guidance notes mirror the current content in the appendix of the existing rule handbook.
How do the changes to the SRA Accounts Rules affect the office manual?
A common misconception about the new SRA Accounts Rules is that the changes reduce the requirements on compliance and that firms can take a more relaxed approach. This could not be further from the truth. While the new rules have removed their previous prescriptive nature, the onus is actually returned to law firms and their COFAs to formulate their own rules and polices. It is a further step towards a regulatory environment which is focused on outcomes.
The changes to the SRA Accounts Rules allow greater flexibility for practices to adopt policies which are more tailored to them. This means a further shift in how reporting accountants conduct their work, as practices adopt their own policies towards safeguarding client funds. This is likely to involve a review of compliance with the SRA Accounts Rules 2019 and with firms’ own set policies: the review further increases the importance of documenting and applying the controls and procedures which practices apply.
What are the changes to the SRA Accounts Rules that may need to be added to the office manual?
The SRA is expected to issue supporting guidance notes to some areas in support the new rules. In the meantime, based on the current understanding, there are some key areas to consider with a view to including in the office procedures manual.
- Using client funds to pay disbursements and recharges.
The new rules state that, where a disbursement or recharge is paid from the firm’s own office funds, the firm must send a bill or other form of written notification to the client before it can transfer any funds held in the client account. Currently there is no requirement to notify the client separately when transferring the funds from the client account, as long as the practice actually incurred the disbursement.
Policies will therefore need to reflect these important changes. The SRA recently noted that an email to the client with the details would meet the requirements for written notification. Policies may also need to reflect that there is no longer any reference to professional disbursements, such as counsel fees.
- Residual client balances
The existing Rule 14.4 requires a firm to notify clients of any client funds held once their matters have substantially completed and every 12 months thereafter, for as long as the funds are held. This rule was introduced to ensure residual client balances can be returned to clients if contact has been lost.
This requirement is no longer included in the new rules and firms will need to adopt suitable polices to ensure residual client balances do not arise. This will still be seen as a high-risk area.
- Donation of residual client balances
The contents of the existing Rule 20.2 no longer feature in the 2019 Rules. We understand these will form part of the prescribed circumstances within the new Rule 5.1. The SRA is still to issue details of the prescribed circumstances and we believe the current contents of Rule 20.2 may be included within them.
As a result, the practice will need to update policies in this area: this could simply mean replicating the existing contents of Rule 20.2 and accounting system guidelines.
- Clients’ own accounts
The new rules imply that law firms operating client-own accounts will now need to reconcile these accounts fully at least every five weeks at the same time as they reconcile the main client bank account. This is one of most significant changes under the new rules, although precise details are not entirely clear on what law firms should do to modify their existing procedures.
The SRA is aware that the sector is looking for clarity on this area and we understand further guidance will be issued. In the meantime, law firms can realistically do little till the SRA issues its guidelines.
Firms will need to modify their policies to reflect changes in the new rules. These will cover office money, banking client receipts promptly rather than “without delay,” dealing with mixed receipts, transferring client funds against costs, the treatment of LAA funds and paying client interest.
Law firms and their COFAs will need to consider the wider implications of the changes to the SRA Accounts Rules 2019. Where they make policy changes to the office-procedures manual, they should ensure they communicate them throughout the firm and provide the appropriate training. It is important this does not become a “box-ticking” exercise.
This publication is produced by Francis Clark LLP for information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information contained herein. While Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of its issue), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.
Comments