The Solicitors Regulation Authority has published a consultation relating to proposed updates to a number of their rules and codes. The main body of changes relates to the operation of the SRA Solicitors Accounts Rules 2019, with several of those changes potentially having an implication for most firms. There are, however, also proposed changes to the SRA Authorisation of Firms Rules, the SRA Code for Individuals and the SRA Glossary.
This is just a consultation, so the rule changes are not immediately in the offing, but experience tends to be that when the SRA proposes something if this nature, it tends to go through eventually.
We will look at each of the groups of changes in turn.
The SRA Accounts Rules (SARs)
Costs in advance
The first of the proposed amendments relates to the issue of whether solicitors can take costs in advance of work being done. Despite the clear explanation in the SRA Guidance “Taking Money for Your Firm’s Costs”, there appears to have been some confusion as to whether a firm could take money for costs not yet incurred. Perhaps this comes from a misunderstanding as to what the term “money on account of costs” means and what must be done with such money.
As rule 2.1 of the SARs currently provide, client money (i.e. not the firm’s money and therefore not entitled to be transferred to the business/office account) includes money “in respect of your fees … if held or received prior to delivery of a bill for the same”. This should be read in conjunction with rule 4.3 of the SARs which states that where money is being held and some or all of it is for costs then a bill, or other notification of those costs, must have been given to the client or bill payer BEFORE the money is transferred out of client account and any sum transferred out must be the amount specified in that bill or notification.
Therefore, even if you have asked for money on account of costs, you cannot take that money, that is to say transfer it out of client account, until the client has been billed for the work to which it relates (or until you have paid a disbursement out of office account for which see later). The purpose of money on account of costs, (or indeed the payment of money in relation to disbursements), is simply to avoid solicitors being left in the position of having done work for which they are not paid or left in the position of needing to make a payment, e.g. Stamp Duty Land Tax, to complete a transaction and that money not being forthcoming from the client. The payment does not make the money the solicitor’s money. It is still the client’s money and must have the protection of the safeguards afforded by client account, until such time as the client has been billed and it ceases being the client’s money.
To address this confusion the SRA is proposing a rewording of rule 2.1(d) of the SARs. Currently it states that “”Client money” is money held or received by you …. in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same”. This apparently is capable of giving the erroneous impression that provided a bill is sent, the solicitor can charge for work not yet done or for a disbursement not yet incurred.
In order to clarify the position, and thus prevent clients from losing the protection of having money held in a client account, it is now proposed that this be changed to “… in respect of your fees and any unpaid disbursements if held or received prior to the delivery of a bill, or other written notification, of the costs once these have been incurred”. In other words trying to clarify that the costs (or indeed disbursements) must not only have been billed but also incurred before the bill can be rendered and not be in relation to work not yet done or disbursements not yet incurred.
Hopefully, the changes to Rule 4.3 of the SARs might also help reinforce this message. Although not specifically referred to in this section of the consultation, the change to 4.3(a) clarifies that “where you are holding client money and some or all of that money will be used to pay your costs … (a) you must give the client or the paying party a bill or other written notification, of the costs incurred”. Although there is none in the rule, the emphasis there should be on the word “incurred”. It also goes on to make it clear in 4.3(c) that any payment into office account for costs must be only for the sum identified in the bill and that again this must be in relation to “costs incurred”.
Whether this is enough without some additional clarification as to the meaning of money on account of costs remains to be seen. A problem is that, as with much else of the shortened rule book, that unless the Guidance Note is read alongside the rule or code then it may not always be apparent to everyone what the intention behind the rule is.
Reimbursement of money spent on behalf of the client
The second issue about which there appears to be some confusion nis in relation to when a firm can and cannot take money out of client account in respect of disbursements.
Again, the starting point here is Rule 2.1(d) of the SARs which, as we stated above, currently provides that “Client money is money held or received by you … in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same”. Here, the qualification of when and how that money may be taken into business/office account is not so clear. Rule 2.1(d) therefore has to be interpreted negatively, i.e. money that is not client money, and therefore business/office money, is money in relation to disbursements that are not unpaid – i.e. disbursements that have been paid. Where this becomes even less clear is by reference to “bill for the same” that comes at the end of the sentence.
In other words there is an implication that disbursements can only be taken once the client has been billed for them.
The only way in which this requirement can currently be made sense of is by interpreting yet another fairly opaque rule, namely 5.1(a) which permits client money to be withdrawn from client account “for the purpose for which it is being held”. Thus, you need to understand that by this, the SARs mean that where the money is in client account for the payment of disbursements then taking the money out once those disbursements have been incurred (and possibly also paid if paid from business/office account) is permissible. No mention is made of the client needing to be billed for those disbursements, but by the same token, no reference is made to them NOT needing to be billed. That therefore leaves the hazy interpretation of Rule 2.1(d) which states:
“in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same”.
It is easy to see how confusion can arise.
Again, however, referring to the SRA Guidance “Taking Money for Your Firm’s Costs” it is clearly stated in the section “Reimbursements for money spent on behalf of the client” that “Rule 5.1(a) of the Accounts Rules allows money for paid disbursements to be transferred from the firm’s client account to the business account as the money is being used for the purpose for which it is being held” and goes on to say “We would expect you to explain to your client how and when payments might be made on their behalf from your business account and that you will then be seeking a reimbursement from the client account in accordance with Rule 5. You could do this in your client care letter, terms of engagement or in other communication with your client”. In other words, provided the client knows what the disbursements are and you have warned them in advance, the a bill is not needed for those disbursements to be taken.
Again, we are suffering from the too many provisions in too many different places problem. Without the guidance, the rule does not really make sense.
Which is where the proposed amendment comes in. The SRA is proposing that a new rule 4.4 be added to the SARs stating:
“Rules 4.3 does not apply where you withdraw client money from a client account in full or partial reimbursement of money spent by you on behalf of the client, or the third party for whom the money is held”.
In other words the requirement contained in 4.3(a) (as it will be amended) “you must give the client or the paying party a bill or other written notification, of the costs incurred” does not apply to disbursements provided that the “other written notification” element, which is also to be found in 2.1(d) has been satisfied – even if that is by means of a general statement in a terms of business or retainer letter.
Does it clarify things? A little. It could be made clearer if it specifically stated that a bill does not have to be presented.
Operating a Client’s Own Account
The next issue that the rule changes seek to address is that of where the firm or an individual solicitors operates a bank or building society account belonging to their client. This might arise, for example, where the solicitor has been appointed as a deputy (Court of Protection) or attorney (under a power of attorney). This has the benefit of the client’s money not needing to be transferred into client account – and potentially falling foul of Rule 3.3, of which more shortly.
The rule as currently drafted is to be found in rule 10.1 of the SARs. This provides that:
“If, in the course of practice, you operate a client’s own account as signatory, Part 2 of these rules does not apply save for:
- rule 8.2 – statements from banks, building societies and other financial institutions;
- rule 8.3 – reconciliations;
- rule 8.4 – bills and notifications of costs.”
The problem to be rectified here is that the controls set out in rule 8 are all well and good when the solicitor can get access to the information needed to maintain those controls. When access cannot be gained, for example because it is not possible to access monthly bank statements to an account belonging to a client which they control, complying with the requirements of rule 8 become something of a challenge.
Again, separate guidance has been issued by the SRA which those reading the rules may not have been aware of. That guidance was in “Statement of our position regarding firms operating a client’s own account” issued in September 2019 (and updated in November 2019). Here, the SRA stated that “We understand that not all law firms will keep ledgers for a client’s own account and will not have access to monthly bank statements in order for reconciliations to carried out at least every five weeks. If you are unable to meet these requirements, we will not regard you as being in breach of the SRA Accounts Rules if you take reasonable steps to record – and satisfy yourself – that the client’s money is not at risk and to record the position.”
They stated that their expectation was that firms would maintain:
- a central register of the client own accounts operated by them,
- a separate record of the transactions carried out by or on behalf of the firm in respect of the client’s own account, and
- a record of the firm’s bills and other notification of costs relating to that client’s matter.
In other words a statement saying that although there was a rule, it would not be enforced if certain alternative provisions were observed. Not an ideal situation.
To address this, the SRA is now proposing that Rule 10.1 be amended to state that Part 2 does not apply but firms are still expected to:
“(a) obtain periodic statements from banks, building societies and other financial institutions for each such account;
(b) keep a record showing transactions initiated by you which should be checked against the statements from banks, building societies or other financial institutions; and
(c) keep readily accessible a central record of all clients’ own accounts that you operate including all bills or other written notifications of costs given by you.”
And that a new rule 10.2 be added to provide a safeguard to the effect that:
“The record kept under rule 10.1(b) must be signed off by the COFA or a manager of the firm at least every 16 weeks. You should promptly investigate and resolve any differences that have been identified.”
Whilst this does address the problem of the management of the client own account, what it does not address is the confusion that some solicitors still show in differentiating between the operation of a client’s own account as set out above and the improper use of client account as a banking facility, which is what could happen if the client own account were not able to be operated.
Rule 3.3 of the SARs provides that a solicitor “must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawals from a client account must be in respect of the delivery by you of regulated services”. This has been promoted in such a high profile way that many firms are afraid, possibly quite rightly so, of any activities on client account that are not “in respect of the delivery by you of regulated services”.
Whilst there is a Warning Notice in respect of the improper use of client account, no where in that warning notice does it refer to the fact that client own account transactions are permitted.
Yes, rule 10 of the SRAs states that Part 2 does not apply – and thus by implication Rule 3.3 does not apply. Some clarification of the situation may have helped the many solicitors who ae still confused by this.
Easing restrictions on freelancer activities
The next two amendments are designed to ease the situation where solicitors wish to undertake certain types of work outside of their firm. Two scenarios are envisaged:
- where a solicitor wishes to undertake pro bono work outside of their firm or organisation, and
- where a solicitor wishes to administer oaths or statutory declarations outside of their firm or organisation.
In both cases, the solicitor doing so would strictly be regarded as operating as a freelancer in doing so and, as such, would need to inform the SRA of their intention to practise in that way.
In relation to the first of these, clearly this will operate as a disincentive to solicitors to undertake pro bono work which can often be provided to help to increase access to justice for those who are unable to afford to pay for legal services.
In relation to the second, the notification requirement, together with the need for adequate and appropriate insurance, is putting solicitors off administering oaths. There was, as we have seen is often the case, guidance issued by the SRA in January 2022 stating that solicitors would not be regarded as being in breach provided that they did not:
- charge a fee for administering oaths or statutory declarations other than the statutory fee and
- provide the services of administering oaths or statutory declarations by way of business.
Many will not have been aware of that statement.
To deal with both of these situations, the SRA is proposing that there be changes to the rules.
In relation to pro bono work, the SRA is proposing to remove the notification requirement for solicitors providing pro bono services outside of their firm or organisation. However, there is still a bit of a sting in the tail. Thus, where such services are reserved legal activities, there is deemed to be a greater risk to the public. Accordingly, and perhaps reasonably, the solicitor must still meet the SRA’s requirement of having practised for a minimum of three years since admission or registration. However, somewhat more controversially, they must still have adequate and appropriate insurance. The amendment is to be found in the SRA Roll, Register and Publication Regulations where a new regulation 2.2 provides “Where a solicitor or an REL practises in accordance with regulation 10.2(a) of the SRA Authorisation of Individuals Regulations or in the circumstances set out in regulation 10.2(b)(i) to (vii) of the same, the fact that they practise in this way does not need to be included in the roll or the registers under regulation 2.1(g) if all legal services, when practising in this way, are provided pro bono”.
To understand this, it is necessary to know that regulation 10.2(a) of the SRA Authorisation of Individuals Regulations provides that “If you otherwise would be, you will not be regarded as acting as a sole practitioner and you will not therefore need to be authorised as a recognised sole practice if … (a) your practice consists entirely of carrying on activities which are not reserved legal activities” whilst regulation 10.2(b) (i) to (vii) covers issues including practising as a solicitor or REL for a minimum of three years since admission or registration and maintaining indemnity insurance providing adequate and appropriate cover for the services you provide or have provided.
In relation to the administering oaths situation, this is principally covered by the addition of a new regulation 10(2)(c) to the SRA Authorisation of Individuals Regulations which provides that “… you will not be regarded as acting as a sole practitioner and you will not therefore need to be authorised as a recognised sole practice if … the only reserved legal activity undertaken by you when practising on your own is administering oaths or statutory declarations and you meet the following conditions: (i) you do not charge a fee for administering oaths or statutory declarations other than the statutory fee; and (ii) you do not provide the services of administering oaths or statutory declarations by way of business, and you choose for your practice not to be authorised as a recognised sole practice”.
Authorisation of Firms Rules
The proposed change to the Authorisation of Firms rules is quite a technical one and is intended to deal with the less usual situation where a person’s percentage interest in a firm fluctuates. The definition in the Legal Services Act 2007 states that someone has a material interest in a firm if they own 10% or more of the shares or voting rights. Under the SRA Authorisation of Firms Rules (AFRs), the SRA may approve a person’s designation as owner of an authorised body if they are satisfied that the individual is fit and proper to undertake the role. However, to be an owner for the purposes of the AFRs they must hold a “material interest” in that authorised body. If there are fluctuations in a person’s shareholding then they could conceivably move below the 10% threshold and thus fall outside of the definition of an owner.
To address this, the SRA will amend rule 13.7(c) of AFRs to state that approval of a person’s designation under rule 13.1 or 13.6 as a role holder only expires “when the person ceases to carry out the designated role, save that in the case of an owner, approval expires when the person ceases to be an interest holder or a partner, as appropriate”.
Carrying on reserved legal activities in a non-commercial body
The SRA Code for Solicitors RELs and RFLs (Code for Individuals) provides at paragraph 5.6 that those solicitors carrying on reserved legal activities in a non-commercial body must ensure that the body takes out and maintains indemnity insurance. The intention behind this was to limit the requirement to circumstances where services are being provided to the public.
The SRA are proposing changing the Code for individuals to make it clear that this requirement is to ensure that the need for a non-commercial body to have indemnity insurance is limited to where reserved services are being provided to the public.
In this way, the SRA may not therefore receive quite so many requests for waivers.
Thus, the revised 5.6 will read “If you are a solicitor or an REL carrying on reserved legal activities for the public or a section of the public in a non-commercial body, you must ensure that: ….”
And finally, the SRA is planning merely to tidy up the definition of a solicitor in the Glossary to remove a reference to the SRA Indemnity Insurance Rules and the Minimum Terms and Conditions of Insurance (MTC) as this is no longer relevant.