SRA Accounts Rules – A Change to Billing in Advance?

Shortly before Christmas 2022, the SRA issued an open consultation which included minor amendments to the Standards and Regulations. As part of this they proposed some changes to the Accounts Rules 2019.

One of the omissions, when the 2019 Accounts Rules came into force, was that of fixed fees and agreed fees. However the definition of client money was changed under rule 2.1(d) to state that:

“client money is money held or received by you:…………..(d) in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill”.

This technically means that irrespective of whether work has been completed by the solicitor for a client, once any invoice has been presented, the money ceases to be client funds and changes to become funds belonging to the business. Therefore, the demise of the agreed fee went much unnoticed.

The SRA have often raised concerns about billing in advance, especially in respect of the risks that can potentially fall upon the client.

If a business suffers financial hardship and ends up going into administration or liquidation, then if work has not been completed, the client may find themselves having paid for a service that has not yet taken place.

On the flipside, billing in advance can be extremely advantageous for law firms especially those on the smaller side. In situations, for example, where a client account is not held or there maybe a time lag between the work being done and completed, billing in advance allows for a steady stream of cash flow into office account.

Under the 2011 Accounts Rule “office money” included…..”money for or towards an agreed fee”.

An "agreed fee" is “one that is fixed - not a fee that can be varied upwards, nor a fee that is dependent on the transaction being completed. An agreed fee must be evidenced in writing”.

Under the new proposals suggested, 2019 Rule 2.1(d) has been changed so that client money is now defined as:

“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”.

This essentially means that just because you issue a bill, the money earmarked for this does not become the firm’s money at that point unless the cost has been “incurred” which essentially means that the work has been done.

Does this change things in reality? Yes and no. Most firms will not invoice until the work, or the majority of it, is done in any event.

However, if a firm wants to bill in advance it seems that they can still rely on Rule 5.1(b) of the 2019 Rules which states that:

“You can 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”.

This means that if the client has agreed in writing to a different arrangement (such as taking funds in advance of work) then this may be okay as long as the client is explained the associated risks.

2019 Rule 5.1(b) is only in respect of a withdrawal from client account. So if money for a fee was deposited straight into the business (office) account what is the position, then? My own opinion is it would probably be sufficient to bypass the change in Rule 2.1(d) if the arrangement is agreed in writing with the risks outlined. However, it is not clear and something the SRA need to provide clarity on.