6 AVOIDABLE RISKS that many UK firms became exposed to in 2020

You want to serve your clients as best you can.

2020 made that extremely challenging with accountants and bookkeepers forced to work from home, client demands being greater than ever before and changing legislation that you had to understand.

This has forced many firms to resort to different methods of communicating with their clients, selling services via online methods and getting all of their team members to work harder and faster than ever before.

All of these changes create risk, which seems really unfair, because all you’re trying to do is to help your clients right?

But when something goes wrong, and people are fined or lose money, they want someone to blame, and in those cases, you need to be protected, and unfortunately, all the goodwill in the world won’t offer much protection.

Some of the larger firms may have the resources to have risk and compliance experts to help them to navigate these often complicated regulatory and compliance challenges. 

But very often, the smaller firms do not.

"All too often when I am assisting firms in their risk management, I see engagement letters that are poorly crafted, and which do not protect the client or the advisor. A good engagement letter is the first step in ensuring a well managed, long lasting relationship between the client and the advisor." - Karen Eckstein

Many smaller firms ‘hope’ that they’ve been given what they need from their professional body. They ‘hope’ they’ve understood it. They ‘hope’ they’ve constructed their engagement letters in the best possible way to afford them and their clients the protection they need.

But through our research of these firms, we found an alarming number, overly exposed to easily avoidable risks.

Here are some of those risks...

#1 Consumers Need the Right to Cancel

A self-assessment tax return can only be sold to an individual aka a Consumer, not a company. Even if it’s within a company’s proposal and they pay for it, this service can only be consumed by an individual.

As such, if you sell this service via any means, other than face to face, you  probably fall under Consumer Contracts Regulations and MUST include a Right to Cancel to that consumer. And if it's outside the regulations, at the very least, until the client has had the cancellation notice, you can’t enforce a right to recover your fees.

RISK REDUCING ACTION: Ensure that any Engagement Letters aimed at individuals contain a Right to Cancel notice and any services, which could be packaged up into a company proposal, includes the Right to Cancel within that Service Schedule. But you can include a ‘start work now’ clause as well, to minimise delay and risk for you in terms of fee recovery.

#2 Giving Generic Advice on Social Platforms Creates Risk

Many firms have been quick to support their clients throughout 2020, which has meant they've had to resort to platforms like WhatsApp to get their message out en masse. But if someone acts on that advice and something goes wrong, you need to be protected.

This may seem unfair, because you’re only trying to help, but those receiving that advice need to know that it’s only generic and serves only as guidance.

RISK REDUCING ACTION: Ensure you have the appropriate clauses in your engagement letter so that your clients know that they can only rely upon specific guidance related to their specific circumstances, given in writing by people with the proper authority. And in those forums, when you are providing information, make it clear that this is information and not advice, saying something along the lines that,  “This is provided for information only and not specific advice and cannot be relied upon without taking advice on your specific circumstances etc..” This is also a way of generating potential fee income, as it can lead people to realise that they need advice on their specific circumstances. 

#3 Commissions Need to be Declared

Firms have rightly explored ways to generate additional revenue and introductory commissions is one of those. But if you don't declare commissions to your clients that you receive from third parties, you could be accused of mis-selling, have your professional body membership revoked, have to pay those commissions back and be fined tens or even hundreds of thousands.

And this is not about scaremongering. This is very real, happening AND being published about firms.

RISK REDUCING ACTION: Ensure that your terms and conditions reflect how you are paid for certain services with a Commissions Clause. Send an Introductory Letter to the clients outlining the nature of how you're paid for those services. Declare any commissions via a Commission's Notification once you receive the money.

#4 Start Dates Need to be Communicated for EACH NEW SERVICE 

Instability creates change. Many businesses have questioned their fees or service level and have moved accountants or bookkeepers.

But when you're signing up new clients, it's unlikely that you will be starting every agreed service on the start date of that new client engagement. Maybe their previous accountant is completing their VAT Return until the end of the quarter. Maybe they're doing their own payroll for another month, or resolving outstanding tax queries with HMRC. 

If you don't clearly communicate the precise date you're assuming responsibility for EACH SERVICE, you may be accused of failing to meet your responsibilities, doing work that you weren’t authorised to perform and liable for someone else’s mistake.

RISK REDUCING ACTION: Ensure that you clearly present the start date of each service to your clients within your engagement letter, which is fundamental to establishing the respective responsibilities of you and your client. You should also communicate the deadline for receiving information and the filing deadlines for each service. This further helps to set clear expectations and strengthens the client relationship.

#5 Every Director or Partner Needs to Sign a new Engagement Letter

When things go wrong, people want someone to blame. And that doesn't mean they'll blame you, they may also blame themselves. So if you're acting for a business with multiple Directors or Partners, they each need to sign the engagement letter, but also, there must be a Nominated Person to take instructions from.

Without this, you can expose yourself to disgruntled parties wanting to know why you've done (or not done) certain things. While this may not land you a sanction from your professional body, it will certainly take your time to resolve, and make it extremely difficult to recover your fees. 

I know of one case which took 250 hours to resolve, that a second signature would have resolved in minutes. Multiple signatures protect you AND the client from themselves.

RISK REDUCING ACTION: Use an engagement letter signing system that allows for multiple signatures and the ability to establish a Nominated Person for each service. This also helps to manage GDPR risks concerning data privacy.

#6 Liability Caps need to be Reasonable, Negotiated & NOT a Multiple of Fees

The work you do is complicated and your clients are complex, which means there is a high likelihood that at some point, something will go wrong. The chaos of 2020 has significantly increased that likelihood.

In order to protect yourself, your clients and your firm against unnecessary risk, you need to limit your liability. One way to do that is to set a reasonable LIABILITY CAP for your client engagements. If a liability cap is not deemed to be reasonable, it may be struck out and you could be on the hook for UNLIMITED liability which could be in excess of your  Professional Indemnity Insurance limit. If you are not a limited entity, that means you could face personal liability. If you are a limited entity, it may mean the end of that limited entity. 

In order for a liability cap to be deemed reasonable, it must…

• Be drawn to the client’s attention
• Be capable of being negotiated with the client. (Having a fixed liability cap for your firm, means it’s more likely to fail.)
• Take into consideration the nature of the engagement with the client
• Take into account the risk factors of that engagement
• Take into account the client’s own specific circumstances
• Take into account your professional indemnity insurance limit.

The reason why a multiple of fee isn't probably appropriate to determine the liability cap is because the fee only relates to your duty and not to the potential loss a client could face. So a low fee could give rise to a large loss and so a multiple of fee is likely to be held by the courts to be unreasonable.

RISK REDUCING ACTION: Establish a series of reasonable liability caps. Present these caps to the client as part of your engagement process so they are available to be  discussed and agreed with the client. Ensure your Liability Clause reflects what’s been agreed and place it in the first part of your Engagement Letter (not hidden in the terms and conditions.

Conclusion

You only want to do good. You want to serve your clients to the best of your ability, because now, more than ever, they need your help.

But regardless of what you do or why you do it, you always need to ensure you and your clients are protected.

These unprecedented times have forced us to work in different ways, understand changing legislation and operate outside of our comfort zone and so it is likely that we’re more exposed to risk than normal (and have less time than ever to consider it.)

“But we were only trying to help” is no defence against clients who are out of pocket or when you receive a monitoring visit from your professional body.

Please make sure you take the proper advice, that your engagement letters are solid and that everyone in your firm AND your clients, understand clearly their responsibilities, BEFORE you do anything.

“The best time to plant a tree was 20 years ago. The second best time is now.” 

Hindsight is a wonderful thing, so regardless of what you have right or wrong, don't beat yourself up too much. NOW is a great time to revisit your current client engagements to reduce those risks as you move into 2021.

An Alternative Risk Reducing Action

Many firms are under-resourced to consider all of the risks and take the required actions and are often reliant upon engagement letter templates, which they’ve had to assemble themselves and which they ‘hope’ to be sufficient.

If you don’t have the resources or the time to take all these actions to give you the protections you need, sign up for OverSuite from GoProposal. 

• OverSuite takes minutes to set up
• Contains all of the clauses stated above to give you the protection you need (along with a whole other raft of protections)
• Has clear video training for you and your team to use
• Is written in plain English for everyone to easily understand
• Has multiple signatures, automated key dates tables and the liability caps selector.

OverSuite helps you to achieve some of the highest levels of protection because it has the expertise built in, allowing you to focus on serving your clients as best you can and doing good.

The Experts Involved

OverSuite was developed in conjunction with some of the UK's leading risk and compliance experts, including...

Valerie Steward - At the forefront of compliance for over 30 years. Authored and co-authored a number of technical guides, work programmes on audit and anti-money laundering and practical aids such as engagement letters

Ian Waters - As Head of Standards, Ian led ACCA’s work in all areas of regulatory policy, including emerging areas such as legal services and anti-money laundering supervision.

Karen Eckstein - 30 years of experience in professional risk and contentious tax and has been on the Council of ATT and Chair of Professional Standards at CIOT/ATT.

I’m very proud to be involved in this collaboration, which has remained focused on achieving the best possible outcomes for accountants and their clients. The collective knowledge and experience of all concerned has given rise to an exciting solution – a product that addresses the requirements of law and regulation in a helpful, ethical and proportionate way. - Ian Waters