A forum of Midlands law firms has welcomed new guidance on financial vigilance – as far as it goes.
A gathering of Compliance Officers for Finance and Administration, a legal network established by the Midlands office of national audit, tax and advisory firm Crowe Clark Whitehill, agreed that client protection against fraud was paramount.
But full regulatory reform is on hold with a decision on controversial reporting accountant requirements deferred by the Solicitors Regulation Authority until at least September and maybe beyond.
Partner Ross Prince, who heads Crowe Clark Whitehill’s Professional Practices team in the Midlands and has a particular specialism in advising law firms, was instrumental in setting up the firm’s COFA Network.
He said: “The SRA has again stressed the need to ensure that, where firms choose to hold client money, appropriate safeguards are in place to assure the safety of that money. But, wisely, it is re-assessing how best to achieve that in view of consultation responses.”
The most contentious proposal surrounded the possible removal of the mandatory requirement that law firms must submit an annual accountant’s report to the SRA, to be replaced by a new requirement for COFAs to sign a declaration that they are satisfied that the firm is managing the client account appropriately.
This provoked widespread concern that elimination of the requirement for external scrutiny might lead to a greater risk of misuse of clients’ funds, not less, among those firms that don’t properly engage with appropriate risk management and their compliance obligations.
Mr Prince noted: “Thankfully, nothing is now likely to be rushed through.
“In smaller firms especially, the SRA like the relationship between law firm and accountant and feel this can help firms to improve their financial management,
“It has been recommended that the proposed declaration to be made by COFAs is removed, the feeling being it would create confusion as to who is responsible for compliance in a firm, given that the buck stops with the partners.
“As for the role of the accountant, more work is to be done in this area and it is likely that the scope of work carried out will change, with a greater emphasis on ensuring a law firm has robust financial systems and controls.”
Mr Prince added: “It’s good to see a healthy dialogue in terms of financial scrutiny and the prevention of fraud.
“The SRA have shown that they have carefully considered the responses to these consultations and decided more work is needed. Hopefully the final outcome will make it very much harder for those who would seek to misuse client funds to succeed in doing so, while still being proportionate. ”
The SRA is to introduce three other significant changes:
• There will be a requirement on all firms to ensure they have an appropriate level of indemnity insurance cover, but reducing the mandatory minimum level of compulsory cover to £500,000 from £2-3 million.
• The amount that can be withdrawn from residual client balances and donated to charity without SRA approval is to rise from £50 to £500.
• Compensation Fund eligibility criteria will change so applications will only be considered from individuals and small businesses, charities and trustees where turnover, annual income and trust value do not exceed £2 million respectively.
Mr Prince said: “With so much happening in the legal world at the moment, it is vital that COFAs and partners keep on top of the changes. It is good to see that those who engage in the consultation process do get heard and our COFA Network continues to provide a useful forum to debate these issues.”