Law firm accounts overhaul

New solicitors accounts regulations come into force on 1 July 2023. They replace the existing 2014 regulations, which were mostly a consolidation of all the accounts regulations dating back to 2001.

That does not, however, mean that the 2014 regulations no longer matter – they do. They remain in full force for all accounting periods that begin before 1 July 2023 and until the solicitor has filed the accountant’s report for that year with the Law Society. They also remain in full force for any investigation that starts before 1 July 2023.

Protection

A major aim of the many changes and additions brought in by the new regulations is to increase protection for client money and to clarify or beef up the existing regulations. Most of the key changes affect solicitors, but a number impact reporting accountants, too.

Reporting accountants now have to:

• file reports within five months of the accounting date (previously, six months)
• test-check postings before and after the accounting date (analogous to an audit of these items)
• test-check that withdrawals of fees are agreed by or at least notified to the client, which will require an inspection of the file for documentary evidence of either the consent or the notification.

Deficits

Rather than waiting to submit the annual report, reporting accountants may report an opinion or a suspicion of a deficit directly to the Law Society. Such serious issues should be dealt with when they are discovered rather than delayed until an anticipated reporting date.

Where a solicitor ceases to practise, a reporting accountant’s closing report is to be filed within three months of cessation (although the three-month period can be extended with the Law Society’s written agreement). This time limit is a new requirement.

The Law Society must also provide reasons for the withdrawal of approval of a reporting accountant and reporting accountants must inform the Law Society when they cease to act for a solicitor.

Client funds

Balancing statements for client account transactions are to be prepared at quarterly (rather than six-monthly) intervals. Reference to this new regulation in Part II (2) in the schedule makes no practical difference to reporting: the reporting accountant must produce particulars of the balancing statement at the accounting date (year-end) and the date six months before.

Investigations may now be carried out away from the solicitor’s place of business. This would seem to allow for remote inspections at the reporting accountant’s office, similar to Revenue’s desk audits.

The Law Society may also instruct an authorised person (ie the person carrying out an investigation) to seek out any information and documentation – and to communicate with any individual (including the reporting accountant) – deemed necessary.

Account balances

Common practice has been made part of the regulations in that it is no longer a requirement to open a separate bank account where a solicitor is acting as the personal representative of an estate. The various definitions of controlling trustee and non-controlling trustee no longer contain any reference to a solicitor acting as a personal representative.

Solicitors must review client ledger balances for any undue or unnecessary delays in discharging client money and to take immediate action where appropriate.

Dormant balances

Under the new regulations, the reporting accountant must prepare a listing of client ledger balances that are two years or more outstanding at the accounting date. This may be an onerous requirement as some practices have many such balances. The list must be approved by the solicitor’s compliance partner.

As part of the move to resolve potential issues with old and dormant accounts:

• Client money must be returned to a client as soon as practicable when the legal service has been delivered. Previously, this was only an implied obligation.
• Documentary evidence of any payment in cash from a client account must be obtained and must include the witnessed signature of the recipient of the money. Such payments are very unusual, and reporting accountants must locate the documentary evidence if they do arise.
• Clients are to be furnished with a statement of account for each matter once that matter is complete. This can be included in their final bill.
• Any transfer of funds from client to office account must be related to specific clients. This provision prohibits blanket or unassigned transfers.
• The Law Society is to be notified of any deficit that cannot be rectified within seven days of it coming to the solicitor’s attention.

Fund transfers

Cheque signatories or (in an online context) transaction authorisers on a client account must include a solicitor who is a partner or a sole practitioner with a current practising certificate. All payments must therefore be signed by at least one principal or partner in the firm, which may cause difficulties in cases of absence or where signatories do not come within the definition.

Registers of undertakings and of funds held on joint deposit are to be maintained.

A file of documents or records detailing all electronic transfers must be maintained.

Confirmation

The compliance partner is to provide specific confirmation to the Law Society, through the form of acknowledgement, which is part of the reporting accountant’s report, of compliance with the regulations for the following:

• balancing statements
• balances that are two years or more outstanding
• review of client ledger balances for undue or unnecessary delays
• backup of computerised accounting systems.

Client accounts are not to be used for borrowing from, lending to or organising loans between clients. In effect, such loans have now been banned.

Client accounts are not to be used to hold funds other than for legal services that have been or will be provided. This means that money cannot be ‘deposited’ (or hidden) there by clients. In particular, client accounts may not be used to hold, pass through or pay out solicitors’ personal funds.

Responsibility for breaches of the regulations is now extended to the solicitor responsible for the actual breach, rather than just the principal or partners of the firm.