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How to be SRA accounts rules compliant part 3: The common client residual balances challenges most SME law firms face  

Category: Blog, Practice Management, Staying Compliant 23rd December 2024

Managing client residual balances is a recurring challenge for SME law firms. Despite often being minor amounts, these balances pose significant compliance risks if not handled correctly under the SRA accounts rules. Issues such as inadequate reconciliation, poor documentation, and delays in addressing balances can lead to regulatory breaches, client dissatisfaction, and reputational harm. 

The final part of this three-part guide, explores the most common challenges law firms encounter when dealing with client residual balances and offers practical solutions to help firms stay compliant. 

To find out more about SRA Accounts Rules, click here.

Lack of regular account reconciliation 

The challenge 
One of the leading causes of client residual balances is irregular or ineffective account reconciliation. Without a regular process, small unallocated amounts can remain undetected for extended periods, increasing the risk of non-compliance. For busy SME firms, it’s easy for minor balances to slip through the cracks, especially when managing a high volume of client transactions. 

The solution 
Implement a routine process for reconciling client accounts. Legal-specific accounting software can simplify the reconciliation process, helping you identify discrepancies and address balances promptly. By scheduling regular reviews, firms can ensure compliance while reducing the administrative burden associated with unaddressed balances. 

Inadequate record-keeping and documentation 

The challenge 
Residual balances are often exacerbated by poor record-keeping practices. Without accurate and accessible records detailing the source of funds, it becomes difficult to justify or resolve residual balances. Missing or unclear documentation can also create delays in securing authorisation for withdrawals or transferring funds back to clients. 

The solution 
Develop a centralised system for financial records that ensures every transaction is logged, categorised, and linked to the relevant matter. Case management systems like Osprey Approach make it easier to store and retrieve comprehensive financial records, providing a clear audit trail for any balances. Consistently updating records is crucial for timely resolution and compliance with SRA rules.  

Unclaimed client funds 

The challenge 
A common cause of residual balances is unclaimed client funds, such as overpayments or unreturned deposits. Tracking down clients to return these funds can be challenging, particularly in older or closed matters. Prolonged delays can result in compliance risks, as firms are required to demonstrate reasonable attempts to locate clients before dealing with unclaimed funds. 

The solution 
Proactively address unclaimed funds at the earliest opportunity. At the conclusion of each matter, include notifications about outstanding balances as part of your closure process. For older matters, establish a procedure for tracing clients, leveraging available contact information and reasonable tracing efforts. Compliance software can support this process by flagging matters with unclaimed balances.

Failure to seek proper authority for withdrawal 

The challenge 
Withdrawing client funds without proper authorisation is a serious breach of the SRA accounts rules. Firms sometimes fail to understand or adhere to the requirement for SRA permission, particularly for residual balances exceeding £500. Missteps in this area can lead to fines, sanctions, and reputational damage. 

The solution 
Familiarise your team with the SRA’s guidance on residual balances and withdrawals, ensuring they understand when and how to seek authorisation. Develop workflows in your case management software to include steps for gaining proper approval before initiating withdrawals. This can include assigning tasks to compliance officers or practice managers to oversee withdrawal procedures. s associated with client identity verification and money laundering. 

Lack of consistent policies for handling residual balances 

The challenge 
Inconsistent or poorly defined policies for managing residual balances can create confusion among staff and increase the risk of non-compliance. Without clear processes, firms may fail to address balances in a timely or appropriate manner, leading to accumulated issues and potential regulatory breaches. 

The solution 
Create a standardised policy for handling client residual balances, ensuring that all staff are aware of the procedures to follow. Incorporate this policy into your case management system, using workflows to guide staff through the necessary steps. Regularly review and update the policy to reflect regulatory changes and best practices and provide ongoing training to reinforce compliance standards. 

Overcoming client residual balance challenges 

Effectively managing client residual balances is an ongoing responsibility for SME law firms. By addressing common challenges such as inadequate reconciliation, poor documentation, and unclaimed funds, firms can stay compliant with the SRA accounts rules and maintain trust with their clients. 

Using tools like Osprey Approach helps streamline processes, improve visibility, and support staff in managing residual balances with confidence. Combined with robust policies and regular training, your firm can minimise risks, enhance efficiency, and uphold the highest standards of client care. 

Book a consultation to discover how Osprey Approach can help you effectively complete client and matter risk assessments across your teams. 

For further advice and best practices you can view parts one and two of our SRA Accounts Rules guides.

Disclaimer 

This guide is for informational purposes only and does not constitute legal advice. For detailed guidance on the SRA Transparency Rules, please visit the official Solicitors Regulation Authority website.