Learning Outcomes
This article outlines common breaches of the SRA Accounts Rules 2019 (the Rules) and provides practical guidance on preventing them. After reading this article, you should be able to identify frequent types of non-compliance, understand the potential consequences, and recognise the key systems and controls necessary to maintain compliance within a legal practice, specifically focusing on knowledge required for the SQE1 assessment.
SQE1 Syllabus
For SQE1, you need a practical understanding of the SRA Accounts Rules and the implications of non-compliance. This includes recognising common pitfalls and the mechanisms firms should implement to safeguard client money effectively. Your focus for revision should include:
- Understanding the definition and proper handling of client money versus business money.
- Identifying common breaches such as improper withdrawals, misuse of client accounts, and inadequate record-keeping.
- Recognising the importance of prompt allocation of funds and timely reconciliations.
- Understanding the duty to correct breaches promptly upon discovery.
- Appreciating the role of internal systems and controls in preventing breaches.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which of the following actions constitutes a breach of the SRA Accounts Rules 2019?
- Paying an invoice addressed to the firm from the client account when sufficient client funds are held.
- Using funds held generally on account of costs to pay for a disbursement incurred but not yet billed, where the client has been informed the money may be used this way.
- Transferring money from the client account to the business account immediately after issuing a bill for costs.
- Temporarily using money from Client A's balance to make an urgent payment for Client B, intending to replace it the next day.
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A firm discovers that client money was mistakenly paid into the business account two days ago. According to Rule 6.1, what must the firm do?
- Report the breach to the SRA immediately.
- Transfer the correct amount to the client account promptly.
- Wait until the next bank reconciliation to correct the error.
- Inform the client and seek their instructions on how to proceed.
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Rule 5.3 primarily prohibits which action?
- Failing to pay interest on client money.
- Using the client account to provide banking facilities.
- Withdrawing more money from the client account than is held for that specific client.
- Delaying the return of client money at the end of a matter.
Introduction
Compliance with the SRA Accounts Rules 2019 (the Rules) is fundamental to legal practice in England and Wales. The primary objective of the Rules is the protection of client money. Breaches can lead to significant regulatory action, damage to a firm's reputation, and harm to clients. Understanding common breaches and how to prevent them is therefore essential knowledge for prospective solicitors preparing for the SQE1 assessment. This article focuses on identifying typical breaches and outlining preventative measures.
Common Breaches of the SRA Accounts Rules
Several types of breaches occur frequently in practice. Recognising these is the first step towards prevention.
Improper Withdrawals from Client Account
One of the most critical areas of compliance relates to withdrawals from the client account.
Key Term: client account
A bank or building society account held by a firm in its name, designated for holding client money, separate from the firm's own business money.
Rule 5.3 states that money withdrawn from a client account for a specific client must not exceed the total amount held for that particular client at that time. Using money belonging to Client A to make a payment for Client B is a serious breach, even if temporary.
Key Term: client money
Money held or received by a firm relating to regulated services, including money held on behalf of clients or third parties, as trustee, or for fees and unpaid disbursements prior to billing (Rule 2.1).
Such a situation often arises inadvertently, perhaps due to administrative error or drawing against an uncleared cheque that is subsequently dishonoured.
Key Term: breach
Any failure to comply with the requirements set out in the SRA Accounts Rules 2019.
Worked Example 1.1
A solicitor acts for Client X in a property purchase. Completion requires a payment of £150,000. The solicitor holds £140,000 for Client X in the client account. Believing that additional funds from Client X will arrive later that day, the solicitor authorises the payment of £150,000 from the general client account.
Has a breach occurred?
Answer: Yes. The solicitor has withdrawn £10,000 more than was held for Client X, improperly using £10,000 belonging to other clients. This breaches Rule 5.3. The shortfall must be immediately rectified using the firm's own money (Rule 6.1).
Failure to Keep Client Money Separate
Rule 4.1 mandates that firms must keep client money separate from money belonging to the firm (business money). This usually means maintaining distinct client and business bank accounts.
Key Term: business money
Money belonging to the firm itself, as distinct from client money.
Breaches occur if client money is wrongly paid into the business account or if business money (other than specific exceptions like money to open/maintain the account) is paid into the client account.
Exam Warning
Mixed receipts (containing both client and business money) require careful handling under Rule 4.2. While they can initially be paid into either account, the portion belonging to the other account must be allocated promptly. Paying a mixed receipt entirely into the business account and failing to promptly transfer the client money portion to the client account is a breach.
Delays in Handling Client Money
The Rules require client money to be handled promptly at various stages:
- Payment In: Client money must be paid promptly into a client account upon receipt (Rule 2.3), unless specific exceptions apply.
- Allocation: Funds from mixed payments must be allocated promptly to the correct account (Rule 4.2).
- Return: Client money must be returned promptly to the client or third party once there is no longer a proper reason to hold it (Rule 2.5).
Unjustified delays in any of these processes constitute a breach.
Revision Tip
The definition of 'promptly' is not fixed in the Rules but depends on the context. For receipts, it usually means the same or next working day. For allocating mixed receipts or returning money, undue delay without justification is likely a breach.
Inadequate Record Keeping and Reconciliations
Rule 8 requires firms to maintain accurate, contemporaneous, and chronological accounting records, including client ledgers and cash accounts.
Key Term: reconciliation
The process of comparing the firm's internal accounting records (e.g., cash account, client ledger balances) with external bank statements to identify and correct discrepancies. Must be done at least every five weeks (Rule 8.3).
Failure to keep proper records or perform regular, accurate reconciliations is a breach. Poor records make it impossible to ensure compliance with other rules, such as Rule 5.3 (not overdrawing a client's balance).
Worked Example 1.2
A firm carries out client account reconciliations every six weeks instead of the required minimum of every five weeks. During one reconciliation, a discrepancy is found where £500 was improperly withdrawn from the client account seven weeks prior, but this was not detected earlier due to the infrequent reconciliation.
What breaches have occurred?
Answer: Two breaches: 1. Failure to perform reconciliations at least every five weeks (breach of Rule 8.3). 2. The improper withdrawal itself (likely a breach of Rule 5.1 or 5.3). The firm must immediately replace the improperly withdrawn funds (Rule 6.1) and correct its reconciliation frequency.
Misuse of Client Account as Banking Facility
Rule 3.3 prohibits using a client account to provide banking facilities. Payments into and out of the client account must relate to the delivery of regulated services or a transaction the firm is acting on. Holding client money without a proper reason related to legal services, or making payments unrelated to the retainer, breaches this rule.
Preventing Breaches
Effective prevention relies on robust systems, clear procedures, and a culture of compliance.
Strong Internal Systems and Controls
- Segregation of Duties: Different individuals should be responsible for authorising payments, making payments, and recording transactions.
- Authorisation Procedures: Clear rules on who can authorise withdrawals from client accounts and the limits of their authority (Rule 5.2).
- Regular Training: Ensuring all relevant staff understand the Rules and internal procedures.
- Prompt Handling Procedures: Systems to ensure money is banked, allocated, transferred, and returned promptly.
- Regular Reconciliations: Strict adherence to the minimum five-weekly reconciliation cycle (Rule 8.3), or more frequently if appropriate.
- Clear Client Communication: Informing clients about how their money is held and handled, including interest policies (Rule 7).
Compliance Culture
- COFA Oversight: The Compliance Officer for Finance and Administration (COFA) plays a key role in overseeing compliance and ensuring breaches are identified and rectified (Rule 6).
- Reporting Breaches: Systems for internal reporting of potential breaches and prompt reporting of material breaches to the SRA.
- Management Responsibility: Principals/managers are jointly and severally responsible for compliance (Rule 6.2).
Revision Tip: COFA Role
Understanding the role and responsibility of the COFA is important. They are central to a firm's compliance framework for the Accounts Rules.
Duty to Correct Breaches
Rule 6.1 imposes a strict duty to correct any breach of the Rules promptly upon discovery. If the breach involves money improperly withheld or withdrawn from a client account, the money must be immediately replaced, typically by transferring funds from the firm's business account. Failure to rectify breaches promptly is itself a serious breach.
Key Point Checklist
This article has covered the following key knowledge points:
- The SRA Accounts Rules 2019 aim to protect client money.
- Common breaches include improper withdrawals (Rule 5.3), failing to keep client/business money separate (Rule 4.1), delays in handling money (Rules 2.3, 2.5, 4.2), inadequate records/reconciliations (Rule 8), and using the client account as a banking facility (Rule 3.3).
- A key breach is withdrawing more money than held for a specific client.
- Mixed receipts must be allocated promptly to the correct accounts.
- Client money must be returned promptly when no longer needed.
- Accurate records and reconciliations (at least every five weeks) are mandatory.
- Prevention relies on robust systems, clear procedures, staff training, and effective COFA oversight.
- Breaches must be corrected promptly upon discovery; improperly withdrawn client money must be replaced immediately (Rule 6.1).
Key Terms and Concepts
- client account
- client money
- breach
- business money
- reconciliation
