Learning Outcomes
This article outlines the obligations under the SRA Accounts Rules regarding the correction of breaches. After studying this material, you should understand the requirement to remedy breaches promptly upon discovery, particularly the distinct duty for immediate replacement of client money shortages. You will appreciate the role of the COFA in overseeing compliance and the importance of maintaining adequate systems and records to prevent and address breaches. This understanding is essential for ensuring ethical practice and addressing potential questions in the SQE1 assessments.
SQE1 Syllabus
For SQE1, candidates must understand the practical steps and principles involved when breaches of the SRA Accounts Rules occur. A key focus is the duty imposed by Rule 6.1. Your revision should cover:
- The specific requirement under Rule 6.1 to correct breaches promptly upon discovery.
- The distinction between the prompt correction of general breaches and the immediate replacement of client money improperly withheld or withdrawn.
- The responsibility of the Compliance Officer for Finance and Administration (COFA) and the firm's managers regarding compliance and breach rectification.
- The necessity of robust systems and controls to identify and manage breaches.
- The potential consequences of failing to remedy breaches as required by the Rules.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Under SRA Accounts Rule 6.1, what timeframe applies to correcting a breach involving improperly withdrawn client money?
- Within 7 days of discovery.
- Promptly upon discovery.
- Immediately upon discovery.
- Before the next accounting period ends.
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A firm accidentally pays a £150 supplier invoice from the client bank account instead of the business bank account, causing a client ledger to be overdrawn. Which SRA Accounts Rule is primarily breached regarding the withdrawal?
- Rule 2.3 (Paying client money in promptly).
- Rule 3.3 (Providing banking facilities).
- Rule 5.3 (Withdrawals not to exceed funds held).
- Rule 7.1 (Accounting for interest).
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Which role within a firm has designated responsibility for taking reasonable steps to ensure compliance with the SRA Accounts Rules?
- The senior partner.
- The reporting accountant.
- The Compliance Officer for Finance and Administration (COFA).
- Each individual fee earner.
Introduction
Compliance with the SRA Accounts Rules is fundamental to maintaining client trust and ensuring the safety of client money. The Rules mandate strict procedures for handling funds, but errors and breaches can still occur. Rule 6.1 imposes a clear duty on authorised bodies, their managers, and employees to rectify any breach promptly upon discovery. This article examines this duty, focusing on the specific requirement for immediate action regarding client money shortages and the essential role of internal controls and compliance oversight. Understanding these obligations is essential for day-to-day practice and success in the SQE1 assessment.
The Duty to Correct Breaches Promptly
Rule 6.1 of the SRA Accounts Rules 2019 is explicit: 'Any breach of these rules must be remedied promptly upon discovery'. This overarching requirement reflects the SRA Principles, particularly the duties to act with integrity (Principle 4), in the best interests of clients (Principle 7), and to protect client money and assets (Principle 10).
Key Term: Breach
In the context of the SRA Accounts Rules, a breach refers to any failure to comply with the requirements set out in the Rules regarding the handling of client money, operation of accounts, or maintenance of accounting records.
The term 'promptly' is not defined within the Rules and its interpretation depends on the specific circumstances of the breach. However, the SRA guidance suggests that firms should act quickly once a breach is identified. For minor administrative errors, prompt correction might mean rectifying the record or system issue within a few days.
Immediate Replacement of Client Money Shortages
A critical distinction exists within Rule 6.1 concerning breaches that involve client money being improperly withheld or withdrawn from a client account. The rule states: 'This includes the replacement of any money improperly withheld or withdrawn from a client account'. The SRA expects such replacement to happen immediately upon discovery.
Key Term: Client Money Shortage
A situation where the amount of money held in the client bank account for a specific client (or across all clients in aggregate) is less than the firm's liability to that client (or all clients), often resulting from an improper withdrawal or failure to deposit client money correctly. This includes situations where a client ledger account shows a debit balance.
This requirement for immediate action emphasizes the absolute priority placed on safeguarding client funds. It means that the firm must use its own resources (ie, business money) to make good any shortfall on the client account without delay. Failure to do so constitutes a serious breach.
Worked Example 1.1
A trainee solicitor accidentally authorises payment of a £250 counsel's fee from the client bank account for Client A, believing sufficient funds were held. Later that day, the accounts department discovers Client A's ledger only held £100, meaning £150 of other clients' money was improperly used.
What action must the firm take?
Answer: The firm has breached Rule 5.3 (withdrawals not to exceed funds held for the specific client) leading to a £150 shortage. Under Rule 6.1, the firm must immediately replace the £150 improperly withdrawn from the client bank account. This requires an immediate transfer of £150 from the firm's business bank account into the client bank account. Waiting for Client A to provide funds is not acceptable.
Responsibility for Compliance and Rectification
Rule 6.2 clarifies that the duty to remedy breaches rests not only on the individual causing the breach but also 'on all the principals in the firm'. This means partners in a partnership, members of an LLP, or directors of a company are jointly and severally responsible for ensuring compliance and rectifying breaches, including replacing missing client money from their own resources if necessary.
The Compliance Officer for Finance and Administration (COFA) plays a central role. Designated under the SRA Authorisation Rules, the COFA must take all reasonable steps to ensure compliance with the Accounts Rules and record any failures. They are central to overseeing the identification and prompt rectification of breaches.
Key Term: Compliance Officer for Finance and Administration (COFA)
An individual approved by the SRA within an authorised body who is responsible for taking reasonable steps to ensure compliance with the SRA Accounts Rules.
Identifying and Recording Breaches
Effective systems and controls are essential for identifying breaches promptly (Rule 8.3 requires reconciliations at least every five weeks). Firms must maintain accurate and up-to-date accounting records (Rule 8.1). Regular reconciliation of client accounts against bank statements is a key control for detecting discrepancies that might indicate a breach, such as an incorrect withdrawal or a client ledger being overdrawn.
Once a breach is discovered, firms should maintain a record of it, detailing:
- The nature of the breach.
- The date of discovery.
- The corrective action taken and the date.
- Reasons for the breach (if known).
- Any steps taken to prevent recurrence.
This record assists the COFA in monitoring compliance patterns and deciding whether a breach (or series of breaches) is material and requires reporting to the SRA.
Worked Example 1.2
A firm's cashier reconciles the client bank account and discovers a £50 bank charge has been incorrectly debited to the client account instead of the business account. The COFA is notified.
What accounting entries are needed to correct this immediately?
Answer: The firm must immediately replace the £50 in the client account. This requires a cash transfer from the business bank account to the client bank account. The journal entries would be:
- Transfer out of business account: DR Client Ledger (relevant client or suspense) Business Account £50; CR Cash Sheet Business Account £50.
- Transfer into client account: CR Client Ledger (relevant client or suspense) Client Account £50; DR Cash Sheet Client Account £50. The COFA must ensure this is done immediately and the breach is recorded.
Consequences of Non-Compliance
Failure to remedy breaches promptly, especially those involving client money shortages, is viewed seriously by the SRA. Potential consequences include:
- Disciplinary action against the firm and individuals (including managers and the COFA).
- Regulatory sanctions, such as fines or conditions on practice.
- Damage to the firm's reputation and loss of client trust.
- In severe cases, intervention by the SRA into the practice.
Exam Warning
Pay close attention to the distinction between 'promptly' for general breaches and 'immediately' for replacing improperly withheld or withdrawn client money. SQE1 questions may test your understanding of this specific requirement under Rule 6.1. Failing to recognise the need for immediate replacement of client money is a common pitfall.
Revision Tip
Focus on the practical application of Rule 6.1. Consider scenarios like dishonoured cheques leading to overdrawn ledgers, accidental use of client funds for office expenses, or delays in transferring funds. Understand the steps required for rectification and the COFA's role in ensuring these steps are taken immediately where necessary.
Key Point Checklist
This article has covered the following key knowledge points:
- SRA Accounts Rule 6.1 mandates the prompt correction of all breaches upon discovery.
- A critical aspect of Rule 6.1 is the requirement for immediate replacement of any client money improperly withheld or withdrawn from a client account.
- 'Promptly' applies to general breaches, while 'immediately' applies specifically to rectifying client money shortages.
- The firm's managers and the COFA share responsibility for ensuring breaches are remedied.
- Effective accounting systems, controls, and regular reconciliations are essential for identifying breaches.
- Failing to correct breaches, particularly client money shortages, can lead to severe regulatory consequences.
Key Terms and Concepts
- Breach
- Client Money Shortage
- Compliance Officer for Finance and Administration (COFA)
