Peter Camp says all fee-earners should have a working knowledge of the Solicitors Accounts Rules 1998, and advises on some of the most frequent breaches relating to costs and disbursements

It is six years since the Solicitors' Accounts Rules 1998 became compulsory for all solicitors' firms. The rules are lengthy (93 pages including the notes and the appendices) and, given their complexity, it is not surprising that qualified accountants' reports are not uncommon.


Frequently, breaches occur as a result of a failure to follow the requirements of the rules relating to the treatment of costs and disbursements. These requirements inevitably involve decisions to be taken by fee-earners (not just principals).




Receipt of costs


Several of the rules require solicitors to remove office money legitimately held in client account within 14 days of receipt. One example of when this obligation arises is where costs and disbursements are identified as office money but are paid into client account, either in accordance with rule 19(1)(c) (which permits a payment in settlement of a bill of costs to be paid into client account regardless of its composition), or as part of a mixed receipt (in other words, where the receipt includes client money) dealt with in accordance with rule 20. In either case, the office money must be transferred out of client account with 14 days of receipt. The reference to 14 days is not a reference to 14 working days.


Any withdrawal of client money from client account (including the transfer of costs and disbursements to office account) must be authorised by signature of at least one person listed in rule 23(1). In most cases this will be a principal, but any solicitor holding a current practising certificate can give authority. Consequently, where a firm's accounting procedures require fee-earners to instruct the accounts department to make such transfers, they must be mindful of the limited period within which the transfer must be carried out.


Another example of when office money must be transferred from client account within 14 days is under rule 19(2) and (3). These sub-rules provide that a solicitor, who properly requires payment of his fees from money held in a client account, must first give or send a bill of costs, or other written notification of the costs incurred, to the client or the paying party. Once a solicitor has complied with this requirement, the money earmarked for costs becomes office money and must be transferred out of client account within 14 days.


In most firms, it is the fee-earner who prepares and sends a bill of costs to a client. If rule 19(2) and (3) apply, the 14-day period within which the proper costs must be transferred out of client account starts running the day the bill is sent. Timely instructions must be given to the accounts department to transfer the costs to ensure compliance.




Properly and earmarked


The transfer can only be made if there is a proper requirement for the payment. The notes to rule 19 state that the word 'properly' implies that the work has been done, whether at the end of the matter or at an interim stage, and that the solicitor is entitled to appropriate the money for the costs. The Law Society has stated that, generally in a non-contentious matter, the costs are not properly due until the completion of the retainer, unless the client agrees otherwise or the solicitor, at the outset of the retainer, reserves the right to render interim bills. However, in conveyancing matters, costs are customarily taken on completion of the purchase/sale.


Consequently, if a bill of costs is delivered prior to completion, unless the client agrees otherwise, the costs are not properly due at the date of delivery and the 14-day period does not start to run. On completion of the retainer, the costs become properly due and a bill of costs has been sent to the client. If money is held in client account earmarked for those costs, the 14-day period within which to transfer the costs commences on completion.


It is also necessary for fee-earners to consider if and when money is earmarked for costs. The Law Society has stated that it is for the solicitor to 'earmark' the money - not the client. Consequently, if the solicitor has a sum on account of costs generally in client account and delivers a bill but asks the client for a cheque in settlement of the bill (wishing to retain the sum in client account as a sum on account of future costs), the money in client account is not earmarked for payment of the bill and the 14-day period does not start to run.


If the client replies to the solicitor insisting that the money in client account be used to discharge the bill, this does not change the position under the rules. It is for the solicitor to earmark, not the client. However, if the solicitor refuses the client's request, this might raise other questions of a conduct nature. In other words, is the amount retained in client account reasonable in relation to the work still to be done?


Where a solicitor sends a bill to a client without indicating whether the bill will be discharged from money held in client account or otherwise, the Law Society's view is that the solicitor will be deemed to have earmarked the money in client account for the payment of costs. When sending a bill to a client, the accounts rules do not require a solicitor to specify how the bill is to be paid. However, as a matter of good client care the solicitor should make it clear whether the bill is to be discharged from money held or otherwise.




Approval of costs


In some circumstances (notably trust and probate work) solicitors may wish to seek their client's approval to the bill before transferring costs from client account. However, once a solicitor has earmarked money in client account, has sent a bill or other written notification to the client and payment of the bill is proper, the money must be transferred to office within 14 days irrespective of whether or not the client agrees. Client approval is not required under rule 19.


However, if the solicitor wants to obtain the client's approval before transferring the costs, this can be achieved by sending a bill or other written notification of costs and making it clear in an accompanying letter (or in the written notification) that the fees indicated are a proposal only and asking for the client's approval. At this stage, the 14 days does not start to run. If the client approves (or an amended figure is agreed) the solicitor will have to comply with rule 19(2) by sending a written notification of the agreed costs (or the bill) before transferring the money to office account within 14 days of such notification.


It is dangerous for solicitors to assume that by employing accounts staff, they can safely delegate full compliance with the accounts rules. All solicitors (and other fee-earners) must have a working knowledge of the rules so as to allow proper instructions to be passed to those with day-to-day responsibility for keeping the books of accounts.


Non-practising solicitor Peter Camp is principal of training consultancy Educational and Professional Services, and visiting professor of legal ethics at the College of Law. He is the author of Solicitors and the Accounts Rules: A Compliance Handbook, published in May by Law Society Publishing, and which can be ordered direct from Marston Book Services, tel: 01235 465 656