Legal Abacus COFA Queries Apr-May 2026
Here is our latest selection of queries received whilst we are on the front line working with law firms.
Rent deposits and suspense accounts
Q I’ve recently taken a new position in the finance department of a well-established firm and have notice that there are a number of rent deposits being held as well as a sizeable suspense account. I thought that these were no longer permitted by the SRA. Is this correct and what should I do about them? There is one note in the reporting accountant’s report but the AR1 was not qualified.
A Rent deposits are still an annoyance to the regulator. Since the introduction of the 2019 SRA Accounts Rules you should not be holding rent deposits if there is no longer any proper reason to hold those funds. So the question you should be asking management is what is the total number of deposits and value of monies held? And more importantly why are they still holding them?
One problem area that reporting accountants are still seeing during their year-end audits is general inactivity with Rent Deposits. The SRA has made it clear to all firms that they should not be holding historic Rent Deposits unless they are providing ongoing regulated legal services (Rule 3.3). A firm’s reporting accountant may look for evidence that attempts have been made to rectify the position in respect of historic leases. The point is, the situation will vary from lease to lease, each one of which should be looked into so that action can be taken if necessary. Find time to take a look at your rent deposits and decide whether they are compliant or whether further action is required.
And one more thing, not that long ago the SRA found a firm 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.
So in summary, rent deposits are a thing of the past and should be treated as such.
With regard to the suspense account, returning back to the firm mentioned above, 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 management are you operating one or more suspense account and why?
Second banking facility
Q We have been discussing internally whether we should enter into a second banking relationship, primarily because the interest we earn on our existing client account is not as attractive as some of the rates being offered by other banks. We cannot face moving all of our banking because of the internal disruption this might cause. What would you suggest?
A This is a subject that keeps returning and is particularly relevant since the government launched its consultation into what to do with the interest earnt in client money. Ignoring that for a second, the need to enter into a second banking relationship is something you should give serious consideration to. 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 still a number of banks currently offering some very attractive interest rates on client accounts, it would seem that it would be in every firm’s interest to appoint a second bank whether or not the government’s interest scheme proposal goes through.
Operation of client account as a banking facility
Q We have a number of fee earners who seem happy to keep a matter open when there is still a balance on the client even though the matter appears to have been completed. The answer I am usually given is there may be one or two additional things to attend to and it is easier just to keep the matter live jus in case. What should I say to the fee earners concerned?
A The SRA have a very simple approach – Rule 2.5 dictates that when a matter has completed, close it down! Any balance on client account should be resolved appropriately so that the matter can be closed and archived. It doesn’t matter that the client may have another potential matter that may somehow be linked to the original matter. If a new matter does arise, that will be a new engagement and will require a new client care letter and potentially a new onboarding and AML process.
Register of COFA breaches
Q Our process for documenting breaches seems to be a little hit and miss. I’m not 100% convinced that all of our non-reportable COFA breaches are being properly recorded. Any advice would be gratefully received.
A There are plenty of areas where a general tidying up exercise may be of value to the COFA and the finance department. Comprehensive breaches registers are a must. Providing the reporting accountant with a handwritten notebook that looks like it was recently found down the back of the sofa is probably not going to cut it. They will wish to understand the internal process that the firm goes through to identify breaches and then how they decide whether the breach is reportable or not. This process will need to be documented in the firm’s Accounting Policy Document so that it can be tested and so that any necessary changes to procedures and processes can be implemented.
David Thorpe
Director – Financial Eye