Meeting the SRA's Mark: Lessons Learned from Recent Residual Balance Cases
Recent investigations have demonstrated that the SRA likes to see that firms have adequate processes in place for managing and returning residual balances, with action taken against firms that the regulator feels are falling short of regulatory requirements.
In this article, we look at a couple of recent cases involving residual balances, the processes firms can put in place to manage and return residual balances, and what can be done to prevent residual balances from occurring in the first place.
According to law firm accountancy specialists Hazlewoods, residual balances are the most common reportable breach they see when preparing an Accountant’s Report:
“in all cases this was where firms had not done enough to deal with historic balances. Our view is that this number should continue to fall as firms introduce more robust systems and processes to ensure new residual balances do not arise.”
No matter how hard your team works to prevent residual balances, some will still inevitably occur. The SRA knows this, which is why there are mechanisms in place to enable balances of £500 or less to be donated to charity, and an approval process to handle larger amounts.
Whilst the SRA may accept that residual balances can occur, recent cases have clearly highlighted that firms need to have suitable processes in place for managing residual balances, and be able to demonstrate the steps that have been taken to return funds to clients, including sending annual letters to clients regarding the amount of money held on their behalf.
In a matter from September 2023, an SRA investigation identified that a firm, “Did not have and/or failed to implement adequate procedures to deal with residual client balances on inactive or closed matters” resulting in breaches of the SRA Accounts Rules, Principles and Conduct for Firms.
The firm was fined over £14,000, however the SRA when considering sanctions and controls took into account the admissions made by the firm and the mitigations it put forward, which included the fact that the firm self-reported its conduct and put in place a financial compliance action plan and task force to improve the quality of the firm’s financial compliance.
In an earlier case from June 2023 that resulted in a written rebuke, the SRA describes an on-site inspection where a firm's historic client balances position had increased since a previous inspection conducted by the SRA had identified the same problem.
The firm admitted that it held a “suspense ledger containing unidentified client account credits was still in existence”, and that the COFA for the firm had not taken responsibility for ensuring compliance with the Accounts Rules or undertaken any training in respect of the current Accounts Rules.
The SRA noted that the firm had resulted in three breaches of the Accounts Rules (2.5, 6.1 and 8.1b) and that breaches persisted longer than they should have and were only resolved when prompted.
When considering the appropriate sanctions and controls in this matter, the SRA took into account the admissions made by the Firm and the mitigations it put forward, which included a commitment to obtain bank details at the beginning of matters from clients so they can return funds in the future.
Obtaining bank details at the outset of each case is something that all firms should be doing, as a core strategy to preventing residual balances occurring in the first place.
Reviewing recent cases, whilst it would seem that whilst the SRA may potentially look more kindly on firms if they state how they are going to do better at preventing residual balances in future, it's clear that putting controls in place in the first place means that firms can avoid both fines and reportable breaches.
Obtaining Client Bank Details
By obtaining bank details for each client at the outset of each matter, you can ensure that should a residual balance arise once a matter has been closed, or a matter has been completed and there is client money left over, the balance can easily be returned to the client.
Putting this process in place for all new cases, will reduce the likelihood of residual balances occurring in future - except in the rare circumstances where a client has changed their own bank account details during the course of a matter.
Using our SafeAuth service, you can ensure you always have your clients bank account details on file. You can make capturing bank details a mandatory requirement when opening a matter, and this can even be done at the same time as taking an initial payment form your client using our SafePay service.
Reducing Residual Balances
Using our SafeRemit service, firms can manage a central record of all residual balances, automate reminder messages to clients about the balance, and obtain bank details automatically so that balances can then be returned.
About Safe Capital
Safe Capital makes it simple for law firms to request, receive or return client money swiftly, safely and securely.
Share & Receive Bank Details Securely- Obtain verified bank account details for each client at the outset of the matter
- Share your client account bank details securely with your clients only when needed
- Return client money promptly at the end of a matter using the bank details on file
- Complete register of your residual balances, with detailed history of the steps taken to return funds to your clients
- Variety of workflows for contacting clients, depending on the size of the balance and contact information available
- Auto generation of forms and letters, including SRA withdrawal authorisation requests and charity indemnities
- Swift and secure client payments with one consistent payment workflow for your clients
- Clients can pay by open banking, credit/debit card or manual bank transfer
- Keep client account details away from money launderers and protect clients from payment fraud
