The New Solicitors Accounts Regulations

Some may regard this as a dry if not turgid topic and it may remain that way until you have an inspector from the Law Society taking you to task on same. We are expected and indeed required to know this. Niall Cawley examines the new regulations

The object of this article is to offer a guide, as succinctly as possible given the subject matter, to the main changes introduced to the Solicitors Accounts Regulations. Some changes are welcome and are logical and some are probably going to be unwelcome.

The last major update of the Solicitors Accounts Regulations was in 2001 though there were a number of alterations and a final qualification in 2014. The 2014 Regulations ran to in excess of sixty pages and the latest Regulations which are being brought forward under Statutory Instrument 118 of 2023 run to a similar number of pages.

When Do They Apply To You?

These Regulations came into force on the 1st of July 2023. That doesn’t mean that they immediately apply to you. They will apply from the beginning of your next year. By way of example this writer’s year is the 31st of October and in consequence the new regulations will apply to me on the 1st of November 2023 moving forward and the old regulations will continue to apply until that date. If your accounting year commenced on the 1st of July last, then the new regulations apply immediately.

The Balancing Date

Currently every six months you have to bring your ledger cards into balance, that is to say all ledger cards for the Client Account must be positive or at zero but not negative and all Office Account balances and ledger cards must be negative or at zero.

This balancing date requirement under the regulations has now been increased to every three months which means it happens four times a year or every three months of your accounting year. Failure to do so is a breach of the Solicitors Accounts Regulations.

It should be noted that the obligation for an Accountant to report an imbalance still only applies to imbalances that arise on the expiry of every six-month period as is the position now. That report will be made in the Accountant’s report to the Law Society following the end of your accounting year.

Executor Accounts

Until now where a Solicitor was acting as sole Executor of an Estate the Solicitor was obligated to open a separate Executor Account because he or she was regarded as being in control of a trust. That stipulation is now gone which means that you can use your Client Account where you are acting as sole Executor in the Estate as and from when the regulations next apply to you.

This provision is dealt with in the Definition Sections (Section 2) providing that a controlling Trustee is not “a Solicitor who is a Personal Representative of an Estate”.

Holding Client Monies (Regulation 5)

Going forward you may only hold monies in the Client Account if it is in respect of the provision of Legal Services. You may hold the money for no other purpose. This is aimed in part at clearing out historic balances and there is more of this later in the article, and it also means that if a client asks you to hold monies following the completion of a transaction you may not do so, and the time periods are set out hereafter.

Similarly, Solicitors can no longer hold monies received by them as an authorised investment business firm as being client monies. I reiterate that the monies may only be held for the provision of Legal Services.

Solicitors’ Own Funds (Regulation 5)

Regulation 5 sets out in clear terms that you may not as a Solicitor place your monies in the Client’s Account. You must keep them separate at all times. There are rules in relation to fees for example which we will come due and there is a saver where you received monies in for the purchase of a property and pursuant to a Purchase Agreement or indeed a Loan Agreement.

As you are no doubt aware, where monies are in the Client Account to which the Solicitor becomes beneficially entitled then the Solicitor must remove same within three months of that date; that is of course subject to the regulations to follow in relation to your client’s authority.

Solicitor Employees

This is a significant change from the point of view of employees working who are Solicitor employees. Up until now Solicitors Accounts Regulations did not apply to employed Solicitors but from now on any Solicitor who is an employee and who in the course of his/her employment handles clients’ funds or non-controlled trust monies or insolvent arrangement monies is subject to these obligations personally. This is an extension as you will appreciate of a substantial nature where employees are under the direction of their employers.

Where an employee of course did not handle monies or acted bona fide and can demonstrate same, it seems to this writer that you may have a bona fide defence, but it is quite clear under Regulation 3(2) that responsibility lies with the solicitor responsible for the breach and his/her employer.

Salaried Partner

The definition of a Partner for the purpose of the regulations is extended to salaried partners. The fact that a salaried partner while held out as a partner may in fact be an employee is no saver. The position remains the same under a Practical Partnership Law basis but from a regulatory point of view a salaried partner is fully liable as a partner in a practice.

Historical Balances (Regulation 5)

This is a new provision. Heretofore of course monies belonging to a client ought to be returned to the Client as a matter of course. The new provision provides that you must return the money to the Client within a period of six months after the completion of the provision of Legal Services in respect of the matter in question. As mentioned above this is aimed very clearly at forcing Solicitors to clear out Ledger Cards when the transactions are finished. As you will see afterwards the net effect of this is that initially you are going to have to identify all of the historic balances. There are further provisions to follow in relation to reporting obligations of historic balances of over two years.

Client’s Authority To Withdraw Funds Regulation 7

(1)(2)(a)

From an inspection point of view and a day-to-day management point of view, this provision prohibits withdrawals in respect of any outlays disbursed by a Solicitor without the prior written agreement of his/her client. Though the Regulations go on to provide that a written notification of the client is a minimum requirement. It seems to me that where a Bill of Costs and Cash Account are sent to a client an email confirmation that they are in order ought to be sufficient.

Section 149 of the Legal Services Regulation Act

The Solicitors Accounts Regulations have brought into their body the provisions of Section 149 (2), and this is intended to reinforce the need for documentary evidence that the funds held in the Client Account are being applied to the Solicitor.

Round Sum Withdrawals Regulation 7

(2)(c)

Round sum withdrawals are prohibited under this regulation. Every sum withdrawn must be in respect of a specific notification to client as mentioned above, subject to client’s consent with the intent to stop Solicitors from withdrawing amounts of money from the Client Account without specifying the clients in respect of whom the fees are being withdrawn. This writer is not particularly surprised by this provision and indeed is surprised that there is a view that it is needed.

Deficits And Notice To Law Society Regulation

7 (2)(d) includes a prohibition of a deficit in the Client Account. Apparently, this is a new provision as this writer always thought that that was the situation.

There is a corollary obligation in Regulation 7(3)(a) to rectify a deficit and again this is something of a surprise one would have thought, as one would have thought this was the position anyway.

However, I would like to bring your specific attention to a new provision which is Regulation 7 (3)(b) which provides that you must now notify the Law Society within seven days of it coming to the attention of a Solicitor or within seven days within which it ought to reasonably come to the attention of a Solicitor that there is a deficit that the Solicitor cannot rectify.

At first blush you would say seven days is very tight, but I would think the point to make here is that you have to notify them within seven days of your being satisfied that it cannot be rectified. The above doesn’t apply if this arises as a result of a Bank error.

Records and Cash

There are throughout the regulations consequential amendments in relation to how we keep records. This arises in large part because of the manner in which monies are now being transferred e.g. via EFT. There is therefore an obligation on you to retain copies of each EFT whether the monies are coming in or going out because you may not have for example cheque books or lodgement books anymore and this replaces same and you are obligated as you might imagine generally under Regulation 13(1) to maintain at all times proper up to date Books of Account.

If you take money out which is being transferred from the Client Account to be used as cash you must have a client’s written authority and written records. Personally speaking, I think taking cash out of a Client Account is a bad idea at any time.

Authorised Signatories Regulation 9(5)

This area is being tightened up especially because we live in the time of electronic funds transfers and monies being transferred from desks. An authorised signatory therefore must be a Partner or a Sole Practitioner as a general rule.

A person who is not a Solicitor may act as a sole or authorised signatory only in exceptional circumstances and only with the prior approval of the Law Society. This is to maintain that Solicitors at all times are accountable.

The Two Year Rules Regulation 13

(8)(f)

This is a new regulation which has introduced an obligation on your Reporting Accountants to identify in their report any historic balances that are in excess of two years following effectively the completion of the legal work. The report must detail the reasons why the balances are there and must be signed off by the sole Practitioner/Principal or the Compliance Partner. The regulation talks about outstanding balances, but it seems to me that the logic of the position is that the transaction having closed, that two years after that you still are holding monies. This is part of an overall push to try to remove historic balances if possible. Having said that it is clear that there will be occasions when you are holding monies that you may not be able to pay out, but your obligation is to set out a reason in the report.

I am aware that the Solicitors Benevolent Association has made suggestions to the Law Society that such outstanding balances be paid to it on condition that there is a satisfactory indemnity in place so as to remove the ongoing reporting obligations in relation to same. Apparently, a similar provision is in operation in the UK and would enable Solicitors to deal with small balances.

Aml

The New Solicitors Accounts Regulations incorporate an obligation that you to have a record of the identity of the party providing money to a Solicitor for a transaction. Care has to be taken when monies are being transferred that you know where they are coming from.

Computer Backup

Regulation 27(2)(e) provides that you must maintain backups of accounting records on a computerised system and that they must be maintained securely other than at the Practice’s Office premises. One would have thought this is a sensible provision in any case but obviously it is intended to reinforce against risk of loss of data and the horrendous consequences of any practice where that was to occur without having a backup being in place.

Reporting Deadline

As you are aware your Accountant’s Report has to be filed within six months of the end of your accounting year. That period is now being reduced to five months from the end of your Tax Year. The only saver that has been added to that is that you can, within 14 days prior to the expiry date, request an extension for a further month. Given that many colleagues have had problems in the past in meeting this deadline for whatever reason, it seems to this writer that the shortening of that period is not in my view a welcome one.

Reporting Accountant

There are a number of substantial changes in relation to reporting Accountants and I am going to deal with these using numbered points:

1. You must report to the Law Society that you are changing your reporting Accountant within 14 days of the change.

2. Officers of a Limited Liability Company being your reporting Accountants can sign off on your reports.

3. No one who has a close relationship with you of a personal or business nature can be your reporting Accountant.

4. Reporting Accountants must comply with the relevant guidance issued by their relevant Professional Body.

5. There are provisions for the Law Society to be able to remove/disqualify reporting Accountants.

6. Where a reporting Accountant resigns, he or she must contact the Law Society within 21 days of such resignation giving reasons. The reporting forms are being changed to obligate the Partner or sole Principal/Practitioner to sign off on certain balances as mentioned above.

7. Reporting Accountants can make test checks and check postings that arise both before and after the balancing date.

8. The reporting Accountant is obliged to check that appropriate Bills of Cost and written agreement of Client to every transfer is available.

9. Reporting Accountants are obliged to report any suspicions they have about deficit funds or attempts at concealment to the Law Society and there is protection for reporting Accountants for so doing.

10. If you hold accreditation in Northern Ireland as well as in the Republic of Ireland, then you must also give your report to the Law Society in Northern Ireland.

11. No report is required where a Solicitor is working in the Law Centre.

12. There is also tightening up in relation to Practice closures whereby a closing report must be filed within three months.

Borrowing From Clients

Regulation 35(1) restricts a Solicitor from borrowing monies from a client unless the client is a Money Lender or a Bank and only where the client has been independently advised in relation to same and no monies held in the Client Account can be used for any loan mentioned above. Similarly, loan monies in the Client Account cannot be used for the provision of a loan from one client to another. They must be given to the client who is the lender, and that client must go off and deal with it separately and must have independent legal advice. There is a clear prohibition on Solicitors from lending monies to clients for purposes of obtaining instructions to act.

Registers

The Accounts now contain an obligation to maintain a Register of Undertakings identifying the client and undertaking completion.

Investigations

There is a tightening-up in relation to investigations and I will deal with these also by points:

1. The Law Society may conduct an investigation at somewhere other than your principal place of business as they see fit.

2. There is an obligation to make records available to an authorised person of the Law Society.

3. There is an obligation that a Solicitor or Partner should not delay, obstruct or impede an authorised person.

4. There is enabling provisions for applications to the High Court.

5. The investigations which heretofore applied under Section 68 are being extended to Sections 149 to 153 of said relevant legislation.

6. There are consequential changes in the ability of the Law Society to communicate if a suspected breach has occurred and an obligation on all Solicitors to attend meetings and there are consequences in failure to so attend.

7. Any delay in filing papers may result in Cost Orders being made a gainst Solicitors.

8. Under Regulation 40(1) the Law Society can require that you furnish a list of all Client and Office balances.

The above is intended to be a guide to the changes that have occurred. There is no substitution frankly for reading the regulations yourself and we will all learn as we go along as to the implications of the new regulations going forward. P