On 28 May 2020, the SRA held a webinar regarding the 2019 updated SRA Accounts Rules. As the rules have now been implemented for 6 months, the webinar covered common queries the SRA has been receiving in respect of them; and compliance issues they have been seen occurring in recent months. These are discussed in turn below.
Given the times we find ourselves in there were also points
discussed relevant to the implications of the COVID-19 pandemic on a firm’s
compliance with the Accounts Rules.
1.Common queries received by the SRA in respect of the
new Accounts Rules:
1.1 Requirement to prepare reconciliations where the firm
operates a client’s own bank account (Rule 10)
Guidance in respect of this was initially released by the
SRA in October 2019, and states that where the firm does not obtain sufficient
details to prepare these (i.e. transactions performed by the client), then
reconciliations are not required to be performed. The SRA would expect as a
minimum that a central register be maintained by the firm of all such accounts
operated by themselves, and a list of transactions performed by the firm
through those accounts. The SRA have stated that the Rules may be amended to
reflect this but failing this more detailed guidance will be release in due
course.
Please view our previous blog on SRA Accounts Rules – clarification of the new rules on operation of a clients own account.
1.2 When a firm is permitted to transfer money from the
firm’s client to office bank account, in respect of costs and disbursements
(Rule 2.1(d) / Rule 4.3)
As with the above, the SRA clarified their meaning of these
rules to an extent in October 2019, specifically in respect of Rule 4.3. This
rule states that a “written notification of costs” must be given to the client
or paying party prior to the client to office bank account transfer being made.
It suggests that an invoice has to be raised prior to the transfer of any
funds, even for disbursements. However, the SRA clarified that a third party’s
invoice would be sufficient as the written notification of costs, even though
not addressed to the client. Similarly, if the client had been informed in
writing in advance of the disbursements that would be charged on their matter
(e.g. in the client care letter), this was equally deemed acceptable.
Under Rule 2.1(d), disbursements become office money when
they are ‘incurred’, which is open to interpretation on when this has occurred.
In some instances, the disbursement can be seen to have been incurred prior to
the firm having to fund the payment of it (i.e. anticipated disbursement). In
this instance, the SRA are satisfied that the firm can transfer these funds
from the client to office bank account, provided that there are sufficient
controls in place to ring-fence these funds, to ensure the overarching aim of
the rules – that being that client money is kept safe – is maintained. Over the
coming months the SRA will be issuing more guidance.
Our previous publication on the SRA Accounts Rules – Clarification of the new rules for disbursement payments can be found here.
1.3 Requirement for client money to be available on
demand (Rule 2.4)
In respect of the above, the SRA have received queries
regarding the money being “available on demand”. Clarifying this point, the SRA
gave the example that if a client requested the termination of an engagement on
a Friday afternoon, where a sizeable amount is held in the client bank account.
In this situation, the SRA would not deem it a breach of the rule if the funds
were not released until the following week, if there were valid reasons for the
delay occurring.
2. Common compliance issues occurring:
2.1 Use of client accounts to provide banking facilities
(Rule 3.3)
Under new Rule 3.3, transactions occurring through the
client bank account must be in respect of the firm’s delivery of its “regulated
services” in respect of the appropriate clients. This is a minor variation of the
wording of the old Rules which stated “underlying transaction” rather than
regulated service, although the SRA feel this is a significant change. Once the
service the firm is engaged to provide has been completed, then the firm has no
requirement to hold on to any funds for its client and those funds should
therefore be returned promptly, under Rule 2.5.
2.2 Insufficient controls in place to prevent cyber-crime
Although not a specific rule, as reporting accountants are
now required to review the firm on a risk-based approach, this is a significant
area of control weakness. Given the times we find ourselves in, with a vast
increase in remote working, there is an even greater reliance on electronic
communication. As such, an upturn in cyber-crime has occurred. Firms are
reminded of the requirement to have sufficient internal controls in place to
deter cyber- attack. The SRA suggested that controls might include regular
changes of employee passwords and ensuring there are sufficient review and
authorisation procedures in place regarding withdrawals from a client bank
account. It is also vital that staff are properly trained to ensure they are
aware of the risks and common methods that their cyber-security can be breached.
Furthermore, where issues have occurred in respect of the
above, which have led to funds being misappropriated from the client bank
account, the SRA have reminded firms that they must:
- Replace any shortfall within the client bank
account immediately (Rule 6.1).
- Communicate with insurers so they can assist the
firm; both in respect of funding the replacement of the monies and to assist
with any internal control improvements.
- Communicate with the SRA as the firm has a duty
to report such matters.
3. Implications of COVID-19 on Accounts Rules compliance:
The SRA have published a list of Q&As in respect of
common areas that the current situation may impact upon compliance with the
Accounts Rules, which are accessible through the link below.
The most significant is in respect of the prompt banking of
client funds (Rule 2.3), which may be delayed from the norm due to the firm’s
branch office being closed due to lockdown. In such instances, the delayed
banking is not a breach of the Rule provided the funds are stored securely
until such a time that they can be banked.
https://www.sra.org.uk/sra/news/coronavirus-qa/
For further information on the above, or any aspects of the
new SRA Accounts Rules, please do not hesitate to contact Sam Evans or any
member of the Professional
Practices team on 01772 821021.
