Living the Eye Life! – December 2023 – The benefits of undertaking a winter MOT
This is a good time of year to take stock of what is going on in your department/business and check that you are truly complying with the rules laid down by your regulator. It seems they are using their new fining powers to replenish their war chest after a record number of high-profile firms going under in 2023. We are now seeing fines of up to £100,000 for breaches of AML procedures and up to £25,000 for breaches of the Accounts Rules. All firms will need to double up their efforts in these areas if they wish to avoid paying fines this year.
Financial Eye has developed what we call our SRA winter MOT. It has proved invaluable to the firms that have engaged us and allowed us implement changes that will help keep firms onside with the regulator and hopefully avoid the potential fines. So how do you think you are doing in the current regulatory climate? We have prepared a few questions you should be asking yourself to see how you are coping.
Let’s start with a “hot” one. You will all be aware by now that residual balances have been a serious topic with the SRA since they came into being, but even more so since they re-wrote the Accounts Rules in 2019. Now, they have taken it to another level. Last year we learnt that north London law firm Curwens had been fined £14,000 for holding residual balances in excess of £105,000. This might sound like a lot of money, and it is. But it really isn’t that unusual. Particularly for firms that have been around for a long time and who have been through a series of mergers or acquired other firms along the way. Or where partners have retired or moved to other firms.
The older the balances, the harder it is to get to the bottom of how they arose in the first place. So ask yourself this simple question. How many residual balances do you hold? And by residual balances I mean where there has been no movement on client account during the past 6 months. And here’s another one. What is the total value of your residual balances? Or how about, how many fee earners have left your practice during the past 3 years that still have residual balances allocated to them? If your answers to any of these questions makes for some unpleasant reading, then you may well have a serious problem on your hands.
Returning back to Curwens, the regulator also found that, for eight years, the firm’s systems and processes did not identify and allocate unidentified receipts in client account, “leading to an improper use of a suspense ledger with a significant unresolved balance of £34,453”. You need to ask yourself are you operating one or more suspense accounts? And why?
Rent deposits are also an annoyance to the regulator. So how about this one. Following the introduction of the 2019 SRA Accounts Rules are you still holding rent deposits? And if yes – what is the total number of deposits and value of monies held? And more importantly why are you still holding them? The SRA found that Curwens had used its client account as a banking facility for a decade by receiving, holding and transferring £103,000 in relation to rent and rent deposits received in relation to the firm’s offices – which were owned by partners, ex-partners and connected parties – where there was no underlying transaction or regulated service being provided. Rent deposits are a thing of the past and should be treated as such.
Now AML might or might not fall under your remit. But a failure to comply will impact on everybody working within your firm. At last year’s SRA Compliance conference the SRA leaders made it clear that AML compliance is their highest priority when carrying out the existing and ongoing regulatory audits. They fully intend to identify and penalise (heavily) any instances of non-compliance. There is already plenty of evidence to support this not least the £100,000 fine that was handed to Ashfords at the end of last year. And this was despite the regulator stating that there was no suggestion that any money laundering or other financial crime took place and that Ashfords had actually self-reported.
The SRA said “The firm had procedures and controls in place, however they were not followed” in the three conveyancing matters being investigated. Ashfords admitted breaches, made changes to their policies and procedures, and ensured that appropriate training was put in place for all relevant employees. There are so many questions you could be asking your MLRO but one good one to start with would be do you arrange for regular independent firm-wide reviews of your AML procedures to be carried out and what have been the results?
There are a number of other areas you will also need to consider as part of your winter MOT including your interest policy. This is an area many firms have not really had to concern themselves with in recent years. But given the current levels of interest rates, it is firmly back in the spotlight again. You really need to check that your policy is up to date and that more importantly, it is being applied consistently across the firm. So the question is, have you recently updated your interest policy?
And just one more thing. It’s something I referred to a couple of times last year. It is the need to enter into a second banking relationship. This is not a regulatory obligation, and your existing bank might be the next best thing since sliced bread. But what would you do if one day you came into work and you had been served with a 60-day notice terminating your banking facility. Given that there are a number of banks currently offering some very attractive interest rates on client accounts, it would seem that it would be in every one’s interest to appoint a second bank. So have you spoken to a second bank and if not why not?
If you would like to find out more about our winter MOT, please get in touch for a free, no-obligation chat with one of our consultants.
David Thorpe
Director – Financial Eye