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From October 2014, residual client balances of £500 or less can be dealt with by firms without authorisation from the Solicitors Regulation Authority (SRA), as announced in guidance published by the regulator. The guidance has been issued in response to an ethics question which asked the regulator to clarify whether authorisation is required to withdraw money from a client account in order to pay it to a charity.
What are the changes?
Since 2008, where a residual balance on a single ledger was less than £50 it has been possible to pay such funds to a charity without requiring permission from the SRA, as prescribed by Rule 20.2. However, for individual residual balances greater than £50 an application for authorisation to make such a transfer has to be made to the SRA.
Changes to the SRA Accounts Rules in October 2014 mean the de minimis amount requiring SRA authorisation prior to a transfer will increase from £50 to £500. Firms will now be able to transfer sums out of their client account, including individual balances of up to £500, without first requiring authority from the SRA in order to do so.
What has prompted the change?
The SRA has embarked on a number of initiatives promoted as cutting red tape and easing the regulatory burden upon the profession. The SRA's risk-based approach to regulation means it will only actively regulate matters where it feels there is a real and tangible risk that can be mitigated through proportionate and necessary rules.
By happy coincidence for the SRA, the increase in the amount solicitors may transfer without the need for prior permission is anticipated to reduce the number of such applications (and the corresponding administrative burden for the regulator) significantly. A consultation paper released by the SRA in April 2014 showed a steady increase in the number of applications for authorisation under r 20.1(k). In 2013 there were over 1,100 such applications. The real number of requests is in all likelihood significantly greater, as many firms carry out a round-up of their qualifying dormant balances on a periodic basis and submit them to the SRA as one application. It was often the case that one application would actually contain multiple requests.
Figures suggest that at August 2014 the current waiting time for authorisation to withdraw funds from the client under r 20.1(k) is nearly three months. It is calculated the change to the rules would reduce the number of applications made to the SRA by two-thirds so solicitors should expect a significant increase in speed for applications under the revised rule to be considered and permission granted.
What is the likely practical effect for law firms?
Although a seemingly small change, the practical effect for law firms is likely to be significant. Based upon the number of and steady increase in applications in recent years it is clear that residual client balances affect a large number of firms. The amendment means firms should be able to deal with a far greater number of their residual balances quicker and without recourse to the SRA.
Do firms need to do anything?
While the amount triggering the need for an application to the SRA changes, the practical requirements and operation of the rule remains the same. Whether a residual balance is only a few pence or any other amount below £500.01, a firm must satisfy the requirements of r 20.2 before withdrawing any residual client balances from the client account. A firm must:
Solicitors must carefully consider the use of the terms “reasonable” and “adequate” within the rule and exercise their own judgment accordingly. Steps which are reasonable and adequate to try to trace the beneficial owner of a residual balance of only a few pounds are likely to be very different to those which are reasonable and adequate for a sum of several hundred pounds.
It will be for the firm (and in particular compliance officers for finance and administration) to be satisfied that the steps taken are:
Best practice would be for a firm to record the steps they have taken in relation to tracking down the rightful owners of residual balances. Of equal importance is to document the reasons why a solicitor has elected not to take greater steps – for example, in matters where the expense does not compare to the chances of successfully tracing a beneficial owner or whether such expense is disproportionate to the balance retained.
Only if such decision-making processes are carefully documented and retained can they be later made available for scrutiny in case of any regulatory enquiry of a solicitor or firm’s approach to residual client balances.
First published on Lexis®PSL.
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