Advice & Information – Accounts Rules Amendments From 4 January 2023
The Society consulted on revisions to the Rule B6 (Accounts Rules) in late 2022. These revisions have now completed all stages of review and approval and take effect from 4 January 2023.
This Advice & Information note is intended to assist members with interpretation of the revisions in advance of formal guidance on the revisions being published in due course.
Rule No. | Subject | Comment |
---|---|---|
6.1.1 | Definitions & Interpretation - Accounting Records | The rule change provides simplified and modernised language to reflect the accounting records which should be kept by a practice unit. |
6.1.1 | Definitions & Interpretation – True Financial Position | An updated definition has been provided which sets out that a practice unit must at each month end be able to show the true financial position of the practice unit (in the month end trial balance/accounts) reflecting all material assets and liabilities. |
6.3.1(a) | Naming of client accounts | The change requires that all client accounts are properly named in accordance with the definition of a client account at 6.1.1. This ensures that all client accounts are properly identified to avoid any potential confusion between firm and client funds. The change also avoids difficulties which can arise when the Society needs to take action to protect client funds. |
6.3.1(c) | Payment into a client account. | The previous de-minimus of £50 has been removed. This means that a practice unit should now ensure that all client money is promptly paid into a client account except where the money is immediately to be paid out on behalf of the client or to settle a debt due by the client to the practice unit. |
6.5.1(g) | Drawings from client account | Subsection (g) has been added to make clear that non-client money such as money belonging to the practice unit can be removed from a client account. |
6.5.2/6.5.3 | Drawings from client account | Both of these new rules aim to reduce risk to client accounts by ensuring that the uses of client accounts are restricted in line with their intended purpose – to serve clients. Rule 6.5.2 aims to reduce risk to client accounts by requiring that all drawings from a client account are in respect of/for the purpose of legal services provided to a client. Client account activity would therefore be expected to be that which is represented by the “ordinary business of a Scottish solicitor” when serving their clients. |
Similarly Rule 6.5.3 reduces risk to client accounts by preventing the use of the client account as a personal banking facility by managers/employees of the practice unit and by anyone closely connected to managers/employees of the practice unit. As an example, it would be a breach of this rule to allow a relative of a manager to use a client account to hold, receive and disburse their money for personal purposes which are unrelated to any client service being provided by the practice unit. | ||
6.7.1(v) | Accounting Records | Subsection(v) has been added to make clear that the requirement for the practice unit to maintain comprehensive accounting records applies to any funds received into a practice unit bank account on behalf of a client. As an example, this requires comprehensive accounting records to be maintained where funds are received from the Scottish Legal Aid Board on behalf of a client. |
6.7.2/6.7.3 | Accounting Records | Updated to consistently reflect the requirements of the definition of the practice unit true financial position at 6.1.1. |
6.13.2 | Cashroom Manager | As was the case previously Cashroom Managers are required to use “reasonable endeavours” to acquire and maintain the skills necessary to be effective in the role. |
The new rule gives the Law Society of Scotland the ability to require Cashroom Managers to complete an assessment of their knowledge of the Rule B6. The nature and content of the assessment will be set by the Society and will aim to provide further assurance that Cashroom Managers do have the knowledge necessary to be effective in the role so that client money is properly protected. | ||
Newly appointed Cashroom Managers are required to complete the assessment within 12 months of their appointment. The coverage/frequency of assessment for other Cashroom Managers will be set by the Society. Timescales set for Cashroom Managers to compete assessments are mandatory. Cashroom Managers will be given reasonable notice of when the assessment is to take place and its format. | ||
The Society will take a risk-based approach to the implementation of this rule. If a Cashroom Manager does not demonstrate an appropriate level of knowledge of the requirements of Rule B6 in their assessment, this will not result directly in any disciplinary action against the Cashroom Manager. Instead following actions will be considered following such a result: | ||
• Cashroom Managers may be required to repeat the assessment | ||
• The risk profile of the practice unit will be reconsidered by the Society which may result in the scheduling of earlier and more frequent inspections of the practice unit’s compliance with the Rule B6. This may lead to further action if inadequate levels of compliance with Rule B6 are identified in these subsequent inspections. | ||
Where a Cashroom Manager has not demonstrated an appropriate level of knowledge of the requirements of Rule B6, the Cashroom Manager should take further steps to improve their knowledge in advance of any reassessment and any scheduled inspection of the practice unit’s compliance with Rule B6. | ||
6.17 | Accounts Certificates | In the interest of practice unit efficiency, the previous requirement to submit multiple accounts certificates where a practice unit had more than one place of business has now been removed. A practice unit should now submit one Accounts Certificate covering the whole practice unit. |
For Multi-National Practices (MNPs) there is now a requirement to report to the Society where significant breaches of another regulator’s accounts rules have been breached and reflected in an Accountants Report (or equivalent) submitted to that regulator. The circumstances where a report to the Society is necessary are set out in subsections (a), (b) and (c) of 6.17. The purpose of the new requirement is to ensure that the Society is aware of significant accounts rules compliance issues within the MNP which increase the risk of accounts rules non-compliance affecting the Scottish offices of the MNP or Scottish solicitors working within the MNP. Any matters reported to the Society will be considered as part of a risk-based approach and may result in Society follow up enquiries or the scheduling of an inspection. | ||
Cashroom Managers of the MNP will need to ensure that internal processes have been established within the practice unit to ensure that they are promptly made aware of relevant matters which are being reported to another regulator by the MNP. The Cashroom Manager will then need to consider if the practice unit is required to report the matters to the Society to ensure compliance with 6.17. The Cashroom Manager should keep a note of any matters considered where the decision is taken not to make a report to the Society. | ||
Reports required under this rule should be emailed to fincomp@lawscot.org.uk for the attention of the Director of Financial Compliance. | ||
6.18 | “Practice Information” | Wording has been updated to clarify what information should be made available by the practice unit to support the inspection process. |
6.18.11 | Reinspection charges | Practice units are charged for reinspections utilising a daily rate as set out in 6.18.10. |
6.18.11 now makes clear that the daily rate can be applied to all time spent by the Society in progressing and completing a reinspection. Charging will be based on time records maintained by relevant Society staff and will include “part days”, time spent inspecting on and off site, report writing time, management time, and time spent following up with a practice unit to obtain required information and responses. | ||
Deadlines will be set for provision of requested information and responses and an additional administration charge will be applied where these deadlines are not complied with. | ||
This rule is intended to address situations where a further inspection has been authorised by the Client Protection Sub-Committee but delays by the practice unit regarding the provision of requested information and responses prevent the reinspection from being conducted and concluded efficiently. In these cases, it is appropriate that the additional costs incurred by the Society because of the practice unit’s delays are included in the reinspection charge. This situation only arises in a small minority of cases and a practice unit can avoid incurring any additional costs by ensuring that information requests are dealt with promptly and that responses are provided by the stated deadlines. |