How MHA can help keep your firm compliant in an ever-changing rules framework

Since the new SRA accounts rules came into effect in 2019, firms have had to grapple with newly flexible and sometimes uncertain rules. MHA’s guide to navigating these rules is here to help firms stay compliant.

The new SRA account rules were adopted from 25 November 2019 and were the final part of a three-phase review process of the current account rules and the protection of client funds. The first phase came into effect in October 2014. This changed the format of the Accountants Report and brought in exemptions to certain firms requiring an Accountants Report. It also, controversially, removed the requirement for no qualified reports to be submitted to the SRA.

Phase two was introduced in November 2015, and this was really the precursor to the implementation of the new Accounts Rules. Under an amendment to the existing rules, the exemption for those firms requiring a report was extended. More importantly, it advised accountants to use an “outcome-based” approach to their work, along with a greater focus on risk with regards to the protection of client monies.

The third phase has seen a change to the rules themselves, which has moved away from their “prescriptive and restrictive” nature, towards focussing on key principles and requirements for keeping client money safe in the higher risk areas, as opposed to more “technical breaches” of the rules.

What does our firm need to do?

With the original 53 rules being culled to just 13, and every sentence illustrating the matters which the SRA consider the most important in the protection of client monies, firms were left wondering what changes they actually had to implement to stay compliant.

The new approach puts each individual firm in the position of deciding for themselves how they protect client monies using the key principles in the new rules as a framework. So, for example, a firm may have a policy for transferring earmarked monies which is slightly longer or shorter than the current 14-day requirement, as well as their own policy for accounting for interest. The new rules give the option in certain circumstances of making arrangements with clients that have some flexibility around the payment of monies and making funds available on demand.

The seeming flexibility of the new rules led to firms becoming increasingly concerned that they could easily fall foul of the new interpretative regime if they did not review current systems or if they relaxed controls too much.

Helping to safeguard firms – the MHA solution

Initially, most firms continued to follow the prescriptive nature of the old rules instead of deciding alternative arrangements, as the guidance stipulated that if systems and processes were compliant with the old rules they would mostly remain compliant with the new ones. However, many have since looked for opportunities within the rules to simplify or streamline processes.

While undertaking detailed SRA ‘health checks’ for several clients following the introduction of the news rules, we quickly identified that many did not have their own detailed accounting policies and procedures in place, which is fundamental to compliance with the new rules.

Having the correct systems and controls in place remains key to the protection of client money, however the removal of the prescriptive nature of the rules has meant that there are no time limits in place which firms can use as a benchmark.

We used our in-depth knowledge of the SRA and the associated guidance, alongside our deep understanding of our client’s day-to-day affairs, to produce bespoke policies and procedures on their behalf that both meet the requirements of the new rules in full and ensures that some of the benefits and streamlining of processes that the new rules allow for can be maximised.

For example, procedures may involve the transfer and authorisation of client funds, the firm’s interest policy, treatment of disbursements and the process of dealing with mixed monies.

Such a manual will often also include more general accounting policies such as billing, processing of purchases and VAT.

Get checked, get compliant

Many of the changes since the introduction of the new accounts rules have been warmly welcomed, such as a clear definition of law firms not acting as a banking facility, the emphasis on the importance of systems and controls, and the broad range of guidance.

However, some changes have been criticised for causing confusion, especially where detailed and prescriptive rules have been simplified or removed, leaving matters open to interpretation, such as the transfer of disbursements that have already been paid by the firm, a lack of detail about billing in advance and some confusion surrounding the operation of joint, or clients’ own, accounts.

Overall, the firms that have used the new regime for a review or health check have ensured they are less likely to breach the rules and have been able to make changes to their policies and procedures that will be of benefit to them in future.

About MHA

With more than 135 years supporting professional service firms, MHA member firms provide a comprehensive range of specialist accounting, audit, compliance, tax and business advisory services to help clients achieve a commercial edge now, whilst preparing for the future. As a firm of partners in practice ourselves, we have a deep understanding of the unique issues, challenges and opportunities of owning, working within and managing a successful professional practice.

We support leading practitioners from many disciplines, including solicitors, barristers, surveyors, architects, engineers, recruitment and business consultants, as well as estate and letting agents. Our specialists have considerable experience of how partnerships operate, the market conditions they face and the individual challenges facing partners at all stages of their career. We offer clients our commercial sense and insight to help balance the needs of the practice with the personal aspirations of individuals.

All our services are tailored to meet the unique needs of each client and are delivered with professionalism and integrity.