Learning Outcomes
This article clarifies the fundamental concepts of client money and client accounts as defined by the Solicitors Regulation Authority (SRA) Accounts Rules. It details the specific requirements for designating client accounts to ensure compliance and safeguard funds. By studying this material, you will be able to distinguish between different types of client accounts and understand the regulatory significance of their proper identification, which is essential knowledge for the SQE1 assessments.
SQE1 Syllabus
For SQE1, a core understanding of how solicitors must handle client money is required. This includes knowing the definitions of client money and client accounts, and the rules governing their designation. You need to understand the practical implications of these rules to ensure client money is kept safe and separate from the firm’s funds.
Focus your revision on:
- the definition of client money and business money under the SRA Accounts Rules
- the meaning and purpose of a client account
- the mandatory requirements for naming client accounts
- distinguishing between general client accounts and separate designated client accounts.
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 SRA Accounts Rule requires client money to be kept separate from money belonging to the firm?
- Rule 2.1
- Rule 3.3
- Rule 4.1
- Rule 5.1
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A solicitor receives money from a client specifically to pay stamp duty land tax on a property purchase. Is this money client money or business money?
- Business money, because the firm will pay HMRC.
- Client money, because it relates to regulated services delivered to a client.
- Business money, as it is for a disbursement.
- Client money only if a bill has not yet been issued.
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What information MUST be included in the name of a client bank account according to SRA Accounts Rule 3.2? (Select all that apply)
- The name of the client
- The word "Client"
- The name of the authorised body (firm)
- The matter reference number
Introduction
Handling client money is a core responsibility for solicitors and is heavily regulated to protect the public and maintain trust in the profession. The SRA Accounts Rules (the Rules) set out strict requirements for managing funds that do not belong to the firm. A fundamental aspect of these rules is the correct identification and designation of client accounts. Understanding the meaning of a client account and how it must be designated is essential for compliance and forms part of the foundational knowledge assessed in SQE1.
This article focuses on the definitions provided by the Rules and the specific requirements for naming client accounts, distinguishing them clearly from the firm's own business accounts.
Client Money vs Business Money
Before understanding client accounts, it is essential to differentiate between client money and business money. The Rules mandate that these two types of money must be kept separate (Rule 4.1).
Key Term: client money Money held or received by a firm relating to regulated services delivered to a client; or on behalf of a third party in relation to regulated services; or as a trustee or holder of a specified office; or in respect of fees and unpaid disbursements received prior to delivery of a bill (Rule 2.1).
Key Term: business money Money belonging to the authorised body (the firm) itself. This includes money received for billed fees, reimbursement for paid disbursements, and funds for the general running of the firm.
The core principle is that any money handled by the firm that does not belong to the firm is likely client money and must be treated according to the Rules.
What is a Client Account?
A client account is a specific type of bank or building society account used solely for holding client money. It acts as a safeguard, ensuring that client funds are segregated from the firm's operational finances.
Key Term: client account A bank or building society account held by a firm to hold client money, maintained in compliance with the SRA Accounts Rules.
Rule 3.1 requires that client accounts must be held at a bank or building society branch located in England and Wales. This ensures funds are within the jurisdiction and subject to appropriate regulatory oversight.
Purpose of a Client Account
The primary purposes of maintaining a distinct client account are:
- Safeguarding: To protect client funds from the firm's creditors in case of insolvency.
- Transparency: To provide a clear audit trail of all transactions involving client money.
- Compliance: To meet the strict regulatory requirements set by the SRA.
Designation of Client Accounts
Clear and accurate naming (designation) of client accounts is mandatory under the Rules. This ensures that the nature of the account is immediately apparent to the bank, the firm, the SRA, and any other relevant parties (like an insolvency practitioner).
Rule 3.2 states that the name of any client account MUST include:
- The name of the authorised body (the firm).
- The word ‘client’.
Exam Warning
The inclusion of the word 'client' in the account title is non-negotiable. An abbreviation like 'clt' is not sufficient. Failure to correctly designate the account can lead to breaches of the Rules and potential confusion regarding the status of the funds held.
Types of Client Accounts and Designation
While the basic designation requirements apply universally, the specifics can vary depending on the type of client account used:
General Client Account
Most firms operate a general client account where money for various clients is pooled. This account must comply with the basic designation requirements.
Key Term: general client account A type of client account holding client money for multiple clients or matters, requiring careful ledger management to track individual client balances.
Example Designation: "ABC Solicitors Client Account"
Separate Designated Client Account (SDCA)
For specific circumstances, such as holding large sums or funds for an extended period for a particular client or trust, a firm might open an SDCA. These accounts offer potentially better interest rates and clearer segregation for specific funds.
Key Term: separate designated client account A type of client account opened for money relating to a single client, other person, or trust, which includes specific reference to that client, person, or trust in its title, in addition to the firm's name and the word 'client'.
Rule 13.5(a) of the SRA Accounts Rules 2011 (referenced in the 2016 manual provided) explicitly required the title to include a reference to the identity of the client or trust. While the 2019 Rules are less prescriptive on the exact naming format beyond Rule 3.2, best practice and clarity suggest including such identifiers.
Example Designation: "ABC Solicitors Client Account - Jones Property Matter" or "ABC Solicitors Client Account - Smith Trust"
Worked Example 1.1
A firm, 'Legal Eagles LLP', receives a £50,000 deposit from a client, Mrs. Davies, for a property purchase. The firm decides to hold this in its main client account used for all clients. How should this account be named to comply with Rule 3.2?
Answer: The account must include the firm's name and the word 'client'. A compliant name would be "Legal Eagles LLP Client Account". It does not need to include Mrs. Davies' name as it is a general client account.
Worked Example 1.2
'City Law Associates' holds £1 million in trust funds for the 'XYZ Charitable Trust'. They decide to open a dedicated deposit account for these funds to potentially earn more interest. How should this account be designated?
Answer: As this is an account for a specific trust, it should be designated to reflect this. A compliant name would be "City Law Associates Client Account - XYZ Charitable Trust". This clearly identifies the firm, the nature of the account ('Client'), and the specific trust involved.
Prohibition on Providing Banking Facilities
Rule 3.3 strictly prohibits firms from using a client account to provide banking facilities. Payments into and withdrawals from a client account must be linked to the delivery of regulated legal services or a related transaction the firm is handling. Holding client money without a clear connection to ongoing legal work, or making payments unrelated to the retainer, breaches this rule.
Revision Tip
Remember the core purpose: client accounts are for holding money necessary for legal services, not for general banking convenience. If a client asks you to hold funds indefinitely or make payments unrelated to your legal work (like paying personal bills), this likely breaches Rule 3.3.
Key Point Checklist
This article has covered the following key knowledge points:
- Client money must be kept separate from the firm's own business money (Rule 4.1).
- A client account is a specific bank or building society account in England and Wales used solely for holding client money.
- The name of any client account must include the name of the firm and the word 'client' (Rule 3.2).
- General client accounts hold pooled funds for multiple clients.
- Separate designated client accounts hold funds for a single client or matter and should ideally reference this in the account title for clarity.
- Using a client account to provide general banking facilities is prohibited (Rule 3.3).
Key Terms and Concepts
- client money
- business money
- client account
- general client account
- separate designated client account
