Breaches of the SRA Accounts Rules - Common types of breache...

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.

The coverage emphasises how and why breaches typically occur in practice (improper withdrawals, mixed receipts and misallocations, and banking‑facility misuse), what “promptly” means in core Rules on receiving, allocating and returning client money, and the firm’s duties to keep accurate, contemporaneous records and reconcile at least five‑weekly. It also highlights the duty to correct breaches immediately on discovery (including replacing any shortfall from business funds), the role of the COFA, and proportionate internal controls that prevent errors recurring.

SQE1 Syllabus

For SQE1, you are required to understand the SRA Accounts Rules and the implications of non-compliance, including recognising common pitfalls and the mechanisms firms should implement to safeguard client money effectively, with a focus on the following syllabus points:

• 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.
• Knowing the prohibition on using client account as a banking facility and what counts as a legitimate related legal transaction.
• Understanding mixed receipts handling and what “promptly” requires for transfers between business and client bank accounts.
• Knowing when and how interest must be accounted for, and when separate designated deposit client accounts may be appropriate.
• Recognising permitted alternatives to a client account (joint accounts, client’s own accounts, and TPMAs) and the modified controls they require.

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.

1. Which of the following actions constitutes a breach of the SRA Accounts Rules 2019?
   1. Paying an invoice addressed to the firm from the client account when sufficient client funds are held.
   2. 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.
   3. Transferring money from the client account to the business account immediately after issuing a bill for costs.
   4. Temporarily using money from Client A's balance to make an urgent payment for Client B, intending to replace it the next day.
2. 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?
   1. Report the breach to the SRA immediately.
   2. Transfer the correct amount to the client account promptly.
   3. Wait until the next bank reconciliation to correct the error.
   4. Inform the client and seek their instructions on how to proceed.
3. Rule 5.3 primarily prohibits which action?
   1. Failing to pay interest on client money.
   2. Using the client account to provide banking facilities.
   3. Withdrawing more money from the client account than is held for that specific client.
   4. 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.

Withdrawals are only permitted for the purposes set out in the Rules. Typical compliant scenarios include payment of a disbursement on behalf of the client where there are sufficient client funds, or payment of the firm’s costs where an invoice has already been delivered and the amount is covered by the client’s balance (Rule 4.3 and Rule 5.1 read together). Taking costs before a bill is delivered, or making a payment unrelated to the matter, will breach the Rules.

Key Term: business money
Money belonging to the firm itself, as distinct from client money.

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. Erroneous banking of client money into the business account (or vice versa, other than the limited exceptions in the Rules) is a breach. The mistake must be corrected promptly, typically by a transfer to the correct account, documenting the error and the correction (Rule 6.1).

Key Term: mixed receipt
A single payment that contains both client money and business money. It must be allocated promptly between the correct accounts (Rule 4.2).

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.

Delayed return of funds frequently occurs at the end of a matter (for example, when small residual balances are overlooked). Firms should actively seek to return such sums. Where a client cannot be traced, SRA guidance permits limited charity payments for small residual balances provided reasonable tracing steps are taken and appropriate records kept. The safest approach is to prevent residual balances arising through proactive matter closure procedures and timely communication.

Inadequate Record Keeping and Reconciliations

Rule 8 requires firms to maintain accurate, contemporaneous, and chronological accounting records, including client ledgers and cash accounts. Firms must also obtain bank statements at least every five weeks (Rule 8.2) and reconcile their client bank records at least every five weeks (Rule 8.3). Reconciliations should be signed off by the COFA or a manager once any differences have been investigated and resolved.

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 reconcile at least five‑weekly, or to keep accurate ledgers for each client/matter, is a breach in itself and also increases the risk of other breaches (e.g., undetected debit balances, uncleared cheque reversals, or accidental intermingling of funds).

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.

Key Term: banking facility
The use of a solicitor’s client account to receive, hold or pass funds where there is no related regulated legal service or transaction on which the firm is acting. This is prohibited (Rule 3.3).

Using the client account for day‑to‑day payments at a client’s convenience (paying rent, school fees, or general creditors where the firm is not acting in a related legal matter) is not permitted. The SRA has emphasised that this is objectionable in itself (solicitors are regulated as lawyers, not bankers), carries money‑laundering risk, and in insolvency contexts may distort creditor priorities. If funds do not need to be held in client account for legal work, they should be returned to the client promptly (Rule 2.5). If an independent holding facility is genuinely required and appropriate, a regulated TPMA may be considered.

Key Term: third‑party managed account (TPMA)
An FCA‑regulated arrangement where client money is held by a third‑party provider rather than the firm. Where used, the firm must ensure the arrangement is appropriate, clients are properly informed, and statements are checked regularly.

Worked Example 1.3

A client instructs a firm, after completion of a probate matter, to keep £8,000 in client account and to pay her child’s university fees each term “for convenience”.

Does this breach the Rules?

Answer:
Yes. There is no ongoing legal service or related transaction requiring the firm to hold the money. Retaining and making unrelated payments constitutes providing a banking facility (Rule 3.3) and failing to return money promptly when there is no longer a proper reason to hold it (Rule 2.5). The money should be returned to the client; future payments should be made from the client’s own bank account. A TPMA would also be unsuitable because there is no related legal service to justify third‑party holding.

Mixed Receipts and Misallocations

Mixed receipts are a common source of inadvertent breaches. If a combined payment is credited entirely to business account and the client element is not promptly moved to client account, the firm has failed to keep money separate (Rule 4.1) and to allocate promptly (Rule 4.2). Conversely, if a mixed payment is paid entirely to client account and the business element is not moved promptly, business money will be sitting in client account—also a breach (Rule 4.1).

Policies should specify where mixed receipts are to be banked initially (many firms prefer the client account) and require immediate transfer of the opposite element, with clear supporting records.

Worked Example 1.4

A client sends £1,000 by bank transfer: £600 to settle a billed fee (business money) and £400 on account of future disbursements (client money). The firm pays the £1,000 into the business account and overlooks transferring the £400 client element to client account for three days.

Is there a breach and how should it be rectified?

Answer:
Yes. The £400 client element should be transferred “promptly” to the client account (Rule 4.2). The delay risks breaching Rules 4.1 and 4.2. The firm should immediately transfer £400 to the client account, record the error and correction, and consider whether the delay indicates a systems weakness needing remediation (e.g., daily review of mixed receipts).

Dishonoured Cheques and Debit Balances

Drawing against uncleared funds can result in a shortfall if a client’s cheque is later dishonoured. If a payment has already been made from client account on the assumption the funds were good, the relevant client ledger will show a debit balance—a clear breach of Rule 5.3. Under Rule 6.1, the firm must immediately replace the shortfall from its business account to restore the position, then seek reimbursement from the client.

Worked Example 1.5

The firm receives a client cheque for £500 on account and pays a £120 court fee the next day. Two days later, the bank advises the client’s cheque has been dishonoured.

What must the firm do?

Answer:
The client ledger now shows a debit (insufficient funds for that client), breaching Rule 5.3. The firm must immediately replace £120 from its business account (Rule 6.1) to remove the shortfall in client account. The firm may then pursue the client for the debt and re‑present or replace the cheque if appropriate.

Incorrect Inter‑Client Movements

Misposting a transfer between clients or matters onto the cash book (instead of recording a paper transfer between ledgers) creates audit trail errors and may disguise an unauthorised withdrawal. Inter‑client transfers change the allocation of funds within the client account only and must be supported by proper authority and ledger entries on both sides, with no cash‑book movement. Failure to keep clear records or obtain authority risks breaching Rule 8 and potentially Rule 5.1 if the transfer is not “for the purpose for which funds are held”.

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. Dual authorisation for withdrawals reduces error and fraud risk.
• Authorisation Procedures: Clear rules on who can authorise withdrawals from client accounts and the limits of their authority (Rule 5.2). Require documented evidence supporting each payment (invoice, completion statement, or client written authority).
• Receipt and Banking Controls: Daily banking of client receipts and same/next day review of mixed receipts to ensure prompt allocation (Rule 4.2). Avoid drawing against uncleared cheques where possible; adopt a “no payment until cleared” policy for high‑value items.
• Ledger Discipline: Maintain a separate client ledger for each client and matter with running balances, and monitor for debit balances or unusual activity. Paper transfers between matters/clients must be reflected in both ledgers and supported by written authority.
• Reconciliations and Statement Controls: Obtain bank statements at least every five weeks (Rule 8.2) and reconcile client accounts at least every five weeks (Rule 8.3). Ensure the COFA or a manager signs off the reconciliation after resolving any differences.
• Prompt Matter Closure: Implement a formal matter‑closure checklist to return any remaining client money promptly (Rule 2.5), resolve residual balances, and pay any interest due under the firm’s policy.
• Mixed Receipts Policy: Set out how mixed receipts are processed (which account used initially) and the timescale for prompt reallocation. Train cashiers and fee earners to identify business versus client elements quickly.
• Interest Policy: Maintain a written policy on paying a fair sum of interest (Rule 7.1), including thresholds (de minimis) and when separate designated deposit client accounts are used for large sums to secure a better return for the client.
• Use of Alternatives: Where appropriate, consider permitted alternatives to a client account (joint accounts under Rule 9 or client’s own account under Rule 10) or, if justified for the legal service, a TPMA. Where an alternative is used, apply the modified controls (e.g., five‑weekly statements and reconciliations where required).
• Record Retention and Central Registers: Keep a readily accessible central record of all bills or written notifications of costs (Rule 8.4), and retain accounting records securely for at least six years. Keep a transfer log for inter‑client transfers to evidence authority and purpose.

Compliance Culture

Key Term: COFA
The Compliance Officer for Finance and Administration. A senior individual responsible for taking reasonable steps to ensure the firm’s compliance with the Accounts Rules and for recording and reporting material breaches under the Codes of Conduct.

• COFA Oversight: The COFA leads routine monitoring, ensures reconciliations are timely, reviews breaches logs, and oversees remediation and retraining. The COFA should be able to evidence the firm’s investigations into discrepancies and the rationale for any decision not to report an issue to the SRA.
• Reporting Breaches: Not all breaches are “material”, but serious issues or patterns must be reported promptly under the Codes of Conduct. Factors include client detriment or risk, sums involved, recurrence, and speed of remediation. A single significant misuse, or a cluster of smaller but related issues indicating weakness in controls, can be material and require reporting.
• Management Responsibility: Principals/managers are jointly and severally responsible for compliance (SRA Code of Conduct for Firms, para 8.1), and the COFA must take reasonable steps to ensure compliance and report serious breaches (para 9.2). Training and supervision are key parts of those reasonable steps.
• Anti‑Money Laundering Interface: The prohibition on banking facilities supports AML compliance. Ensure staff can recognise when there is no legitimate legal service purpose for holding funds, and consistently decline improper requests.

Worked Example 1.6

During two months, a firm logs three separate issues in its probate team: a premature transfer of costs before a bill was delivered; a delayed return of a residual balance; and a mixed receipt not allocated for three days. All were corrected, but the cluster suggests weak controls.

How should the COFA respond?

Answer:
The pattern indicates control weaknesses in that team. The COFA should investigate root causes, implement targeted training and process changes (e.g., a matter‑closure checklist and a daily mixed‑receipts review), and decide whether the pattern amounts to a material breach requiring reporting. The decision and rationale should be recorded. Continued monitoring should evidence improvement.

Practical Focus Areas and Frequent Pitfalls

• Withdrawing for Costs: Only transfer costs after delivering a bill and only the specific sum billed, covered by the funds held for that client. Avoid “round sum” or anticipatory withdrawals. Under SRA guidance, reimbursement of paid disbursements without a bill may be permissible if clearly agreed with the client and consistent with Rule 5 (money used for the purpose for which it is held), but policies must be clear and applied consistently.
• Cheques Payable to Clients/Third Parties: Do not bank cheques made payable to a client or third party into the firm’s accounts. Forward them promptly and keep a record on file.
• Inter‑Client Transfers: Obtain proper written authority and record paper transfers on both ledgers, never via the cash book. Ensure the transfer is for a legitimate purpose related to the legal work.
• Banking Facility Risks: Decline requests to hold funds for general convenience or to operate “escrow only” where the firm is not acting on a related legal transaction. Suggest direct payments by the client or, where genuinely related to a legal service, consider whether a TPMA is appropriate.

Worked Example 1.7

A mixed receipt of £75,000 is banked to client account: £70,000 purchase monies and £5,000 for a billed fee. Fee transfer to business account is overlooked for two weeks.

What is the risk and how should the firm respond?

Answer:
Business money has sat in client account contrary to Rule 4.1. The firm should transfer £5,000 to business account immediately, record the breach and correction, and review whether controls (e.g., daily review of mixed receipts) need strengthening. If delays recur, the pattern may become material and require reporting.

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.

Correction should be accompanied by:

• a clear audit trail explaining the error and fix;
• consideration of whether the failure is material (alone or as part of a pattern) and whether to report it to the SRA;
• a review of systems and training to prevent recurrence.

Where residual client balances remain because a client cannot be traced despite reasonable steps, firms should follow current SRA guidance on dealing with such balances (including the possibility of paying small balances to charity with appropriate records). However, these are last‑resort measures after active attempts to return the money, not a substitute for prompt return when a matter ends (Rule 2.5).

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).
• Interest must be accounted for fairly under Rule 7.1, with a written policy and, where appropriate, use of separate designated deposit client accounts to benefit the client.
• Alternatives to a client account (joint accounts, client’s own accounts, and TPMAs) are permitted in defined circumstances but require modified controls and careful oversight.

Key Terms and Concepts

• client account
• client money
• breach
• business money
• reconciliation
• mixed receipt
• banking facility
• COFA
• third‑party managed account (TPMA)