Currently at the top of the legal sector’s agenda is the SRA’s Consumer Protection Review. This topic dominated most of the conversation, with Jason and Andrew discussing the key questions being raised as the legal sector takes stock of a review that could have far reaching implications.

At the outset of the webinar, the audience was invited to share their views on this overarching question. The majority were opposed to the idea of law firms no longer holding client money.

Holding client money has worked reasonably well for the sector for many years, with clients trusting law firms to manage their funds responsibly. The rules and guidelines that monitor and govern the use of client funds remain key to ensure these funds are managed appropriately.

It was considered that suggested alternative solutions, such as third party managed accounts, could be challenging given the current limited number of such providers. Any such change would also create a steep learning curve for the sector.

Many observers feel that, provided there is full transparency with the client and that the client receives a reasonable return on their money, the law firm's earning of an additional return should not be objectionable. Ensuring transparency is, however, crucial for maintaining trust with clients and compliance with the current guidance. Many believe it would be helpful for the SRA to be more prescriptive on what is considered fair and reasonable.

Any changes removing an entitlement to benefit from the current interest arrangements could potentially impact law firms’ financial stability. If firms are no longer allowed to earn interest on client money, it is widely accepted that this would most likely result in the need for fee increases.

The SRA has been issuing questionnaires and making direct enquiries about firms’ policies and procedures regarding residual balances, indicating that this is an area for concern. Improving procedures for dealing with residual balances therefore remains crucial.

It is important for law firms to promptly return any residual balance at the end of a transaction. Administrative delays or difficulties in identifying beneficiary bank accounts are considered to be the main causes for a residual balance to be left unreturned at the end of a transaction, rather than any deliberate ploy by law firms to earn interest.

Creating better procedures to obtain bank details and scope out the transaction at the outset of a matter will not only enable residual balances to be dealt with promptly but will also provide transparency throughout for both the client and the law firm involved.

Provision of banking facilities are governed by Rule 3.3, which dictates that payments into, and transfers or withdrawals from a client account, must be in respect of the delivery of regulated services.

The panel discussed how firms often inadvertently breach this Rule and looked at how fee earners could reduce this risk. Breaches of this Rule often occur in transactions involving complex group structures or entities without bank accounts. Clearly identifying the sources and ultimate destination of the funds at the beginning of the engagement will help firms manage the risk of breaching Rule 3.3.

The webinar then touched on basis period reform and how firms are adjusting to navigate these changes effectively.

Basis period reform has created significant challenges for law firms with non-coterminous year ends. This has accelerated cash flow and created additional administrative work. The panel also examined some of the practical issues that have been experienced by firms and advisers alike.

Finally, the panel posed the question as to whether the audience thought law firms needed to consider partial exemption requirements. Most of the audience considered it to be an important consideration.

HMRC’s internal partial exemption team does not consider interest income to be incidental for law firms, which may require firms to make provisions in their accounts for restrictions on input VAT deductions. The panel looked at some of the considerations and agreed it was an area that has certainly created some debate across the sector.

For practical tips on how to navigate through these issues, please watch the webinar recording below. Alternatively, please reach out to Jason Mitchell or Andrew Baker, who will be happy to discuss matters further.

• Legal Sector Insights: Trends and developments you need to know

^{*the views expressed are the author's and not ICAEW's}