Is this the end to billing in advance?
Robert Blech · June 12th 2023 · read
In April 2021, I wrote an article that there seemed to be the opportunity for law firms to bill in advance, which had previously been prohibited, with the exception of what was known as agreed fees.
There is little doubt that there is more flexibility in the 2019 Accounts Rules than its predecessor, but solicitors also like a detailed set of rules to abide by. It is also important to remember that at all times, one must consider the wider obligations, which include acting with honesty, integrity and in the best interests of each client and in a way that upholds public trust and confidence in the profession.
Under the Accounts Rules 2.1(d), “Client money is money held or received by you…………..in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same”. Therefore, once an invoice has been issued to the client, strictly speaking, the money ceases to be client money.
The SRA issued guidance in September 2020 to try and clarify the position in respect of billing in advance of work being undertaken as well as the transfer of disbursements to the business account. When funds are received in advance, they can be in respect of legal fees, unpaid disbursements, or for a transaction where the firm is acting on behalf of a client.
Rule 4.3(c) of the SRA Accounts Rules 2019 states “any such payment must be for the specific sum identified in the bill of costs, or other written notification of the costs, and covered by the amount held for the particular client or third party”.
The SRA have issued some proposed changes to the Account Rules to try and further clarify this issue. Rule 2.1 (d) is amended to change the definition of client of client money - “Client money is money held or received by you…………..in respect of your fees and any unpaid disbursements if held or received prior to the delivery of a bill, or other written notification, of the costs once these have been incurred”.
It is the word “incurred” which changes this definition and the position of billing in advance. There are also changes to Rule 4.3 in the proposed amendments including part (c ). The whole of Rule 4.3 is now subject to an additional rule (4.4) which states “Rules 4.3 does not apply where you withdraw client money from a client account in full or partial reimbursement of money spent by you on behalf of the client, or the third party for whom the money is held”. This is to make it clear that reimbursement of an amount paid by the firm for a disbursement does not have to wait for a bill to be issued.
So subject to Rule 4.4, “where you are holding client money and some or all of that money will be used to pay your costs:…..4.3 (c ) any such payment must be for no more than the specific sum identified in the bill, or other written notification, of the costs incurred, and covered by the amount held for the particular client or third party”. This means that partial payment of an invoice can be made if funds available and earmarked for that use. We will have to wait and see when and if these changes are confirmed.
Although these amendments make the position clearer, firms have asked whether there are situations where billing in advance can still take place. It does appear that Rule 5.1 may allow for this. Rule 5.1 (b) states that “You may only withdraw client money from a client account……following receipt of instructions from the client or the third party for whom the money is held”. Therefore, if there has been an agreement with the client that the money can be transferred to the business account in advance (once the bill has been issued), then this may be permissible.
However, the SRA are concerned that the risks associated with taking monies in advance are explained to the client. If the firm for example goes into administration and the work has not been completed, there are potentially protection issues surrounding those fund as opposed to them still being held in the client account. Also, there are ethical issues to consider as well. – Are firms acting, or being seen to be acting, in the best interests of their client? Are firms billing and transferring monies in advance in order to “prop” up their business account. This is an important point to consider. If firms are invoicing and transferring funds in advance, the reasoning for them doing so will be of particular relevance.