16
regulation
The CILEx Accounts Rules:
how they add up
With law firms now having the opportunity to be regulated by ILEX Professional Standards
(IPS) for the provision of reserved and regulated legal services, in the coming months
David Pope, IPS entity authorisation and supervision manager, will look at some of
the new rules and guidance applying to both our regulated firms and those considering
making an application.
In (2014) June CILExJ p15, l talked about
the issues around managing client money
and the simple thought that it is not your
money, but you must look after it. I looked
at how that can be achieved and how it
tied in to Principle 9 of the CILEx Code of
Conduct which states:
Protect client money and assets
You must:
9.1 Identify, assess, manage and promptly
address risks to money and assets
entrusted to you by clients and others.
9.2 E
ffectively monitor the financial stability
of your business or your role within
it, so as to protect client money and
assets from risks associated with the
financial position of your business or the
business of your employer.
I now want to look at the CILEx
Accounts Rules and give some thoughts
on the areas they cover. For those
entities either newly regulated by IPS or
considering being regulated by IPS, then
compliance with the rules will form part of
their regulatory arrangements.
However, for those of you who are
running practices providing unreserved
legal activities that do not currently require
regulation, these rules will provide you with
best practice as to the types of accounting
arrangement we would wish to see in
place. They provide you with the type of
financial controls that we wish to see within
your businesses, especially when you are
dealing with client money. By implementing
the policies within the rules, you will be
better protecting yourself and your clients.
If you are considering the opportunities
that gaining a practice right can bring to
your practice in supporting the services it
already provides, then making sure that
you already comply with the CILEx
Accounts Rules will assist you when
submitting an application to become a
regulated entity.
February 2015 Client accounts
It still remains that how you manage client
money is one of the key challenges and
responsibilities for a legal practice. Both
regulatory costs and Professional Indemnity
Insurance premiums will be affected by
the decision you make as to whether to
hold it or not. For a new entity, that will be
an important consideration as to whether
it fits within the structure of the type of
legal practice you want to run and your
relationship with your clients.
As a regulator, we remain committed to
exploring ways to protect both consumers
and those we regulate. As part of our
application to become a regulator of legal
practices, we stated our desire to be able
to offer an escrow account to those entities
that we regulate and these discussions
remain on-going. We believe that there will
be positive benefits to all if we are able to
deliver a suitable system, especially at a
time when there is further scrutiny within
financial institutions on client money and
those individuals or organisations holding it.
We will advise those applicant entities
and authorised entities as soon as we
are able to provide more details about
escrow services.
The CILEx Accounts Rules
The CILEx Accounts Rules, which are
published on the IPS website, have
effectively just nine sections covering
the management of client money and
accounting records. The remainder give
guidance on accountant’s reports.
The accounts rules are written in line
with our risk-based, outcomes-focused
approach to regulation. They give clear
guidance on our expectations in managing
client money, client accounts and
accounting records.
For those of you now holding client
money, you will see our expectations on
the maintenance of an accurate ledger for
each matter for each client as well as the
requirement for regular reconciliation of
client money. We have published on the IPS
website, in the Entity Resources section, a
specimen reconciliation form with a worked
example so you are able to see the type of
reconciliation that is required.
Our rules are clear that we are not
prescriptive in the type of Accounting
Records that you maintain. These can
be either or both, written and electronic,
depending on your needs. However, you
must take every necessary step to ensure
that all Accounting Records are kept safe
and in good order.
We would recommend that you take
appropriate financial advice on putting in
place the systems necessary to comply
with our accounts rules. As well as seeking
advice from a member of the accountancy
bodies, the Institute of Chartered
Accountants in England and Wales or
the Association of Chartered Certified
Accountants, you may wish to look at using
a legal accounts software package. This
can make the process of financial record
keeping easier and less time-consuming.
There are many accounts software
packages on the market that law practices
use which can be useful in ensuring
effective financial management.
Your Business Accounts
Whilst I have been concentrating on client
accounts and client money, our rules
also cover your office account. You must
maintain accurate and up-to-date records
of payments in and out of your office
account.
Financial health of
your business
The above reference to the accountancy
bodies neatly ties in to Principle 9.2 and
CILEx Journal
regulation
strength of your legal practice. When we
receive an application for authorisation,
the business both on day one and on an
on-going basis. As a regulator we have
a responsibility to ensure that an entity
that a client transacts with is able to
and ensuring that it has the appropriate
We would always recommend that
you seek advice and guidance from an
and sustainable business. They should
be able to assist you with budgeting and
six sections of our accounts rules. During
discussion around the value of such reports
and whether they served the purpose for
which they were designed.
We believe that they remain a key part of
managing the risk for a legal practice. Given
that, we are working with the Accountancy
organisations to produce a format of report
that delivers the important risk information
for all the parties concerned.
For the consumer, they provide
entrusted to an entity is looked after
properly with all the correct checks
in place.
For an insurer, they are looking for
an external view on the processes and
procedures that are in place to prevent
customer complaints and the risk of fraud.
For a regulator, whilst we will visit
entities on a regular basis, to have a
accounts and provide support when you
need, say, additional funding for expansion.
Similarly, a number of the high street
banks have specialist managers looking
after the legal sector, and again they will be
able to help with advice and guidance on
sampling and testing process gives
Accountant’s Reports
regulating are correctly looking after client
money. In addition, we would want to see
This brings us on to the subject of
cilexjournal.org.uk
17
secure and able to survive any changes in
the market.
Lastly, and just as important, they
provide an audit for you and your entity
that money is being managed correctly.
For example, there will be instances where
a partner or member of the management
team is not directly involved in the day-toso having an accountant carry out a
no problems or potential liabilities that a
member might be liable for. That gives you
piece of mind.
As discussions continue on the
appropriate format, one of the drivers for
all parties is that by having an accountant
produce a report, we better understand
the true risk posed to and by the entity.
That makes it a more valuable exercise for
both us as the regulator, you as the entity
being reported on, and for the reporting
accountant, who can then provide the
guidance and help you need.
Finally, it enables us to concentrate
resources in helping those entities that
require support, and therefore appropriately
of regulating.
February 2015