SRA Handbook

Accounting systems and records

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Part 4: Accounting systems and records

Rule 26: Guidelines for accounting procedures and systems

26.1

The SRA may from time to time publish guidelines for accounting procedures and systems to assist you to comply with Parts 1 to 4 of the rules, and you may be required to justify any departure from the guidelines.

Guidance notes

(i)

The current guidelines appear at Appendix 3.

Rule 27: Restrictions on transfers between clients

27.1

A paper transfer of money held in a general client account from the ledger of one client to the ledger of another client may only be made if:

(a)

it would have been permissible to withdraw that sum from the account under rule 20.1; and

(b)

it would have been permissible to pay that sum into the account under rule 14;

(but there is no requirement in the case of a paper transfer for a written authority under rule 21.1).

27.2

No sum in respect of a private loan from one client to another can be paid out of funds held for the lender either:

(a)

by a payment from one client account to another;

(b)

by a paper transfer from the ledger of the lender to that of the borrower; or

(c)

to the borrower directly,

except with the prior written authority of both clients.

27.3

If a private loan is to be made by (or to) joint clients, the consent of each client must be obtained.

Rule 28: Executor, trustee or nominee companies

28.1

If your firm owns all the shares in a recognised body or a licensed body which is an executor, trustee or nominee company, your firm and the recognised body or licensed body must not operate shared client accounts, but may:

(a)

use one set of accounting records for money held, received or paid by the firm and the recognised body or licensed body; and/or

(b)

deliver a single accountant's report for both the firm and the recognised body or licensed body.

28.2

If such a recognised body or licensed body as nominee receives a dividend cheque made out to the recognised body or licensed body, and forwards the cheque, either endorsed or subject to equivalent instructions, to the share-owner's bank or building society, etc., the recognised body or licensed body will have received (and paid) client money. One way of complying with rule 29 (accounting records) is to keep a copy of the letter to the share-owner's bank or building society, etc., on the file, and, in accordance with rule 29.23, to keep another copy in a central book of such letters. (See also rule 29.17(f) (retention of records for six years)).

Rule 29: Accounting records for client accounts, etc.

Accounting records which must be kept

29.1

You must at all times keep accounting records properly written up to show your dealings with:

(a)

client money received, held or paid by you; including client money held outside a client account under rule 15.1(a) or rule 16.1(d); and

(b)

any office money relating to any client or trust matter.

29.2

All dealings with client money must be appropriately recorded:

(a)

in a client cash account or in a record of sums transferred from one client ledger account to another; and

(b)

on the client side of a separate client ledger account for each client (or other person, or trust).

No other entries may be made in these records.

29.3

If separate designated client accounts are used:

(a)

a combined cash account must be kept in order to show the total amount held in separate designated client accounts; and

(b)

a record of the amount held for each client (or other person, or trust) must be made either in a deposit column of a client ledger account, or on the client side of a client ledger account kept specifically for a separate designated client account, for each client (or other person, or trust).

29.4

All dealings with office money relating to any client matter, or to any trust matter, must be appropriately recorded in an office cash account and on the office side of the appropriate client ledger account.

29.5

A cheque or draft received on behalf of a client and endorsed over, not passing through a client account, must be recorded in the books of account as a receipt and payment on behalf of the client. The same applies to cash received and not deposited in a client account but paid out to or on behalf of a client.

29.6

Money which has been paid into a client account under rule 17.1(c) (receipt of costs), or rule 18.2(b) (mixed money), and for the time being remains in a client account, is to be treated as client money; it must be appropriately identified and recorded on the client side of the client ledger account.

29.7

Money which has been paid into an office account under rule 17.1(b) (receipt of costs), rule 19.1(a) (advance payments from the Legal Aid Agency), or rule 19.1(b) (payment of costs from the Legal Aid Agency), and for the time being remains in an office account without breaching the rules, is to be treated as office money. Money paid into an office account under rule 19.2(b) (regular payments) is office money. All these payments must be appropriately identified and recorded on the office side of the client ledger account for the individual client or for the Legal Aid Agency.

29.8

Client money in a currency other than sterling must be held in a separate account for the appropriate currency, and you must keep separate books of account for that currency.

Current balance

29.9

The current balance on each client ledger account must always be shown, or be readily ascertainable, from the records kept in accordance with rule 29.2 and 29.3 above.

Acting for both lender and borrower

29.10

When acting for both lender and borrower on a mortgage advance, separate client ledger accounts for both clients need not be opened, provided that:

(a)

the funds belonging to each client are clearly identifiable; and

(b)

the lender is an institutional lender which provides mortgages on standard terms in the normal course of its activities.

Statements from banks, building societies and other financial institutions

29.11

You must, at least every 5 weeks:

(a)

obtain hard copy statements (or duplicate statements permitted in lieu of the originals by rule 9.3 or 9.4 from banks, building societies or other financial institutions, or

(b)

obtain and save in the firm's accounting records, in a format which cannot be altered, an electronic version of the bank's, building society's or other financial institution's on-line record,

in respect of:

(i)

any general client account or separate designated client account;

(ii)

any joint account held under rule 9;

(iii)

any account which is not a client account but in which you hold client money under rule 15.1(a) or rule 16.1(d); and

(iv)

any office account maintained in relation to the firm;

and each statement or electronic version must begin at the end of the previous statement.

This provision does not apply in respect of passbook-operated accounts, nor in respect of the office accounts of an MDP operated solely for activities not subject to SRA regulation.

Reconciliations

29.12

You must, at least once every five weeks:

(a)

compare the balance on the client cash account(s) with the balances shown on the statements and passbooks (after allowing for all unpresented items) of all general client accounts and separate designated client accounts, and of any account which is not a client account but in which you hold client money under rule 15.1(a) or rule 16.1(d), and any client money held by you in cash; and

(b)

as at the same date prepare a listing of all the balances shown by the client ledger accounts of the liabilities to clients (and other persons, and trusts) and compare the total of those balances with the balance on the client cash account; and also

(c)

prepare a reconciliation statement; this statement must show the cause of the difference, if any, shown by each of the above comparisons.

29.13

Reconciliations must be carried out as they fall due, or at the latest by the due date for the next reconciliation. In the case of a separate designated client account operated with a passbook, there is no need to ask the bank, building society or other financial institution for confirmation of the balance held. In the case of other separate designated client accounts, you must either obtain statements at least monthly or written confirmation of the balance direct from the bank, building society or other financial institution. There is no requirement to check that interest has been credited since the last statement, or the last entry in the passbook.

29.14

All shortages must be shown. In making the comparisons under rule 29.12(a) and (b), you must not, therefore, use credits of one client against debits of another when checking total client liabilities.

Bills and notifications of costs

29.15

You must keep readily accessible a central record or file of copies of:

(a)

all bills given or sent by you (other than those relating entirely to activities not regulated by the SRA); and

(b)

all other written notifications of costs given or sent by you (other than those relating entirely to activities not regulated by the SRA).

Withdrawals under rule 20.1(j)

29.16

If you withdraw client money under rule 20.1(j) you must keep a record of the steps taken in accordance with rule 20.2(a)-(c), together with all relevant documentation (including receipts from the charity).

Retention of records

29.17

You must retain for at least six years from the date of the last entry:

(a)

all documents or other records required by rule 29.1 to 29.10, 29.12, and 29.15 to 29.16 above;

(b)

all statements required by rule 29.11(a) above and passbooks, as printed and issued by the bank, building society or other financial institution; and/or all on-line records obtained and saved in electronic form under rule 29.11(b) above, for:

(i)

any general client account or separate designated client account;

(ii)

any joint account held under rule 9;

(iii)

any account which is not a client account but in which you hold client money under rule 15.1(a) or rule 16.1(d); and

(iv)

any office account maintained in relation to the practice, but not the office accounts of an MDP operated solely for activities not subject to SRA regulation;

(c)

any records kept under rule 8 (liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes) including, as printed or otherwise issued, any statements, passbooks and other accounting records originating outside your office;

(d)

any written instructions to withhold client money from a client account (or a copy of your confirmation of oral instructions) in accordance with rule 15;

(e)

any central registers kept under rule 29.19 to 29.22 below; and

(f)

any copy letters kept centrally under rule 28.2 (dividend cheques endorsed over by nominee company).

29.18

You must retain for at least two years:

(a)

originals or copies of all authorities, other than cheques, for the withdrawal of money from a client account; and

(b)

all original paid cheques (or digital images of the front and back of all original paid cheques), unless there is a written arrangement with the bank, building society or other financial institution that:

(i)

it will retain the original cheques on your behalf for that period; or

(ii)

in the event of destruction of any original cheques, it will retain digital images of the front and back of those cheques on your behalf for that period and will, on demand by you, your reporting accountant or the SRA, produce copies of the digital images accompanied, when requested, by a certificate of verification signed by an authorised officer.

(c)

The requirement to keep paid cheques under rule 29.18(b) above extends to all cheques drawn on a client account, or on an account in which client money is held outside a client account under rule 15.1(a) or rule 16.1(d).

(d)

Microfilmed copies of paid cheques are not acceptable for the purposes of rule 29.18(b) above. If a bank, building society or other financial institution is able to provide microfilmed copies only, you must obtain the original paid cheques from the bank etc. and retain them for at least two years.

Centrally kept records for certain accounts, etc.

29.19

Statements and passbooks for client money held outside a client account under rule 15.1(a) or rule 16.1(d) must be kept together centrally, or you must maintain a central register of these accounts.

29.20

Any records kept under rule 8 (liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes) must be kept together centrally, or you must maintain a central register of the appointments.

29.21

The statements, passbooks, duplicate statements and copies of passbook entries relating to any joint account held under rule 9 must be kept together centrally, or you must maintain a central register of all joint accounts.

29.22

A central register of all withdrawals made under rule 20.1(j) must be kept, detailing the name of the client, other person or trust on whose behalf the money is held (if known), the amount, the name of the recipient charity and the date of the payment.

29.23

If a nominee company follows the option in rule 28.2 (keeping instruction letters for dividend payments), a central book must be kept of all instruction letters to the share-owner's bank or building society, etc.

Computerisation

29.24

Records required by this rule may be kept on a computerised system, apart from the following documents, which must be retained as printed or otherwise issued:

(a)

original statements and passbooks retained under rule 29.17(b) above;

(b)

original statements, passbooks and other accounting records retained under rule 29.17(c) above; and

(c)

original cheques and original hard copy authorities retained under rule 29.18 above.

There is no obligation to keep a hard copy of computerised records. However, if no hard copy is kept, the information recorded must be capable of being reproduced reasonably quickly in printed form for at least six years, or for at least two years in the case of digital images of paid cheques retained under rule 29.18 above.

Suspense ledger accounts

29.25

Suspense client ledger accounts may be used only when you can justify their use; for instance, for temporary use on receipt of an unidentified payment, if time is needed to establish the nature of the payment or the identity of the client.

Guidance notes

(i)

It is strongly recommended that accounting records are written up at least weekly, even in the smallest practice, and daily in the case of larger firms.

(ii)

Rule 29.1 to 29.10 (general record-keeping requirements) and rule 29.12 (reconciliations) do not apply to:

(a)

liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes operating in accordance with statutory rules or regulations under rule 8.1(i);

(b)

joint accounts operated under rule 9;

(c)

a client's own account operated under rule 10; the record-keeping requirements for this type of account are set out in rule 30;

(d)

you in your capacity as a trustee when you instruct an outside administrator to run, or continue to run, on a day-to-day basis, the business or property portfolio of an estate or trust, provided the administrator keeps and retains appropriate accounting records, which are available for inspection by the SRA in accordance with rule 31. (See also guidance note (v) to rule 21.)

(iii)

A cheque made payable to a client, which is forwarded to the client by you, is not client money and falls outside the rules, although it is advisable to record the action taken. See rule 14.2(e) for the treatment of a damages cheque, made payable to the client, which you pay into a client account under the Law Society's Conditional Fee Agreement.

(iv)

Some accounting systems do not retain a record of past daily balances. This does not put you in breach of rule 29.9.

(v)

"Clearly identifiable" in rule 29.10 means that by looking at the ledger account the nature and owner of the mortgage advance are unambiguously stated. For example, if a mortgage advance of £100,000 is received from the ABC Building Society, the entry should be recorded as "£100,000, mortgage advance, ABC Building Society". It is not enough to state that the money was received from the ABC Building Society without specifying the nature of the payment, or vice versa.

(vi)

Although you do not open a separate ledger account for the lender, the mortgage advance credited to that account belongs to the lender, not to the borrower, until completion takes place. Improper removal of these mortgage funds from a client account would be a breach of rule 20.

(vii)

Section 67 of the Solicitors Act 1974 permits a solicitor or recognised body to include on a bill of costs any disbursements which have been properly incurred but not paid before delivery of the bill, subject to those disbursements being described on the bill as unpaid.

(viii)

Rule 29.17(d) - retention of client's instructions to withhold money from a client account - does not require records to be kept centrally; however this may be prudent, to avoid losing the instructions if the file is passed to the client.

(ix)

You may enter into an arrangement whereby the bank keeps digital images of paid cheques in place of the originals. The bank should take an electronic image of the front and back of each cheque in black and white and agree to hold such images, and to make printed copies available on request, for at least two years. Alternatively, you may take and keep your own digital images of paid cheques.

(x)

Certificates of verification in relation to digital images of cheques may on occasion be required by the SRA when exercising its investigative and enforcement powers. The reporting accountant will not need to ask for a certificate of verification but will be able to rely on the printed copy of the digital image as if it were the original.

(xi)

These rules require an MDP to keep accounting records only in respect of those activities for which it is regulated by the SRA. Where an MDP acts for a client in a matter which includes activities regulated by the SRA, and activities outside the SRA's regulatory reach, the accounting records should record the MDP's dealings in respect of the SRA-regulated part of the client's matter. It may also be necessary to include in those records dealings with out-of-scope money where that money has been handled in connection with, or relates to, the SRA-regulated part of the transaction. An MDP is not required to maintain records in respect of client matters which relate entirely to activities not regulated by the SRA.

Rule 30: Accounting records for clients' own accounts

30.1

When you operate a client's own account as signatory under rule 10, you must retain, for at least six years from the date of the last entry, the statements or passbooks as printed and issued by the bank, building society or other financial institution, and/or the duplicate statements, copies of passbook entries and cheque details permitted in lieu of the originals by rule 10.3 or 10.4; and any central register kept under rule 30.2 below.

30.2

You must either keep these records together centrally, or maintain a central register of the accounts operated under rule 10.

30.3

If you use on-line records made available by the bank, building society or other financial institution, you must save an electronic version in the firm's accounting records in a format which cannot be altered. There is no obligation to keep a hard copy but the information recorded must be capable of being reproduced reasonably quickly in printed form for at least six years.

30.4

If, when you cease to operate the account, the client requests the original statements or passbooks, you must take photocopies and keep them in lieu of the originals.

30.5

This rule applies only to private practice.