PastPaperHero | Client accounts - Permitted withdrawals from client accounts

Learning Outcomes

This article outlines the rules and procedures governing withdrawals from client accounts under the SRA Accounts Rules, including:

Permitted withdrawals from client accounts (purpose‑held funds, client or third‑party instructions, regulator authorisation) and distinctions from improper payments or banking‑facility use
Requirements for paying the firm’s costs from client money only after delivering a bill, and for reimbursing paid disbursements from client funds in line with the Rules and SRA guidance
Authorisation and supervision of withdrawals, internal controls, and record‑keeping that meet accounting and regulatory standards
Sufficiency checks for cleared funds on the relevant client ledger and immediate remedies for shortages or errors (including bounced cheques)
Prompt return of client money when no longer properly held, and lawful handling of unclaimed balances, including the charity route within prescribed limits and record‑keeping
Accurate journal entries for withdrawals to clients, to third parties, and transfers to the business account, and the use of inter‑client “paper” transfers rather than cash movements
The prohibition on using client accounts as banking facilities and scenarios that risk breaching it, including “client convenience” requests unconnected to regulated services

SQE1 Syllabus

For SQE1, you are required to understand the rules and procedures governing withdrawals from client accounts, including the circumstances in which withdrawals are allowed, the authorisation required, and the safeguards to prevent misuse of client money, with a focus on the following syllabus points:

the permitted reasons for withdrawing money from a client account
the authorisation and supervision requirements for withdrawals
the need to ensure sufficient funds are held for the relevant client before making a withdrawal
the procedures for returning client money to clients or third parties
the prohibition on using client accounts as banking facilities
how to correct breaches relating to improper withdrawals
journal entries for withdrawals and client‑to‑business transfers following delivery of a bill
handling unclaimed balances and the prescribed process for paying residual funds to charity within limits

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.

Which of the following is a permitted reason for withdrawing money from a client account?
1. to pay the firm’s professional fees after delivering a bill
2. to pay a client’s personal utility bills for convenience
3. to transfer surplus funds to the business account without client authorisation
4. to make a payment to a third party unrelated to legal services
What must a firm check before making a withdrawal from a client account for a specific client?
1. that the client has a positive balance in the business account
2. that sufficient funds are held for that client in the client account
3. that the withdrawal is for the firm’s convenience
4. that the client has no outstanding bills
True or false? A client account may be used to provide banking facilities to clients if the client gives written consent.

Introduction

When a law firm holds money for clients, strict rules apply to ensure that withdrawals from client accounts are made only for proper purposes. The SRA Accounts Rules set out when and how client money can be withdrawn, who must authorise withdrawals, and what safeguards are required to protect client funds. Understanding these requirements is essential for SQE1 and for legal practice.

Withdrawal decisions rarely sit in isolation. They connect to related duties to keep client money separate, to make it available on demand unless an alternative written arrangement exists, to return it promptly once the proper reason to hold it ends, and to maintain accurate contemporaneous records and reconciliations. The core permissions and safeguards below must always be applied with these companion duties in mind.

Permitted Withdrawals from Client Accounts

Withdrawals from a client account are only allowed in specific situations. The SRA Accounts Rules require that every withdrawal is properly authorised, supervised, and recorded. The main permitted reasons for withdrawing client money are:

1. For the Purpose for Which the Money Is Held

Client money may be withdrawn to pay for the legal services or disbursements for which it was provided, or to pay a third party as part of the legal matter. This captures payments that are intrinsically connected to the delivery of regulated services, such as:

completion monies in conveyancing
court fees, search fees and other disbursements in ongoing matters
settlement sums and distributions in litigation and estate administration

Where a payment relates to a disbursement, apply the correct VAT treatment and payment route:

Agency method (invoice addressed to the client): if there are sufficient funds for that client, the VAT‑inclusive invoice can be paid from the client account because you are paying as agent and the supply is to the client.
Principal method (invoice addressed to the firm): the firm must pay using business money (even if there are sufficient client funds) and recharge on its own bill with VAT; reimbursement normally follows delivery of that bill. If the firm has already paid a disbursement from business money, it may reimburse itself from client funds only where the money is held for that purpose (see “Reimbursement for Disbursements Paid by the Firm” below) and the Rules and guidance are satisfied.

Transfers recorded purely between client ledgers (for example, moving a stakeholder deposit on completion from a joint stakeholder ledger to the seller’s client ledger, or moving a sum from an executor’s ledger to a beneficiary’s ledger on distribution) are inter‑client “paper transfers”, not cash withdrawals. The total client account balance does not change, but the firm’s records must accurately reflect the new beneficial owner.

Key Term: client account
A bank or building society account, in the name of the firm, used solely for holding client money separately from the firm’s own funds.

Key Term: client money
Money held or received by a firm on behalf of a client or third party in connection with regulated legal services, including money on account of costs or unpaid disbursements before a bill is delivered.

2. Following Client or Third Party Instructions

A firm may withdraw money from a client account if it has clear instructions from the client or relevant third party for whom the money is held. These instructions should be in writing or otherwise clearly documented. The instruction must relate to the client’s matter and the delivery of regulated services; “client convenience” alone is never a sufficient link. Where the payment could be made directly by the client from their own bank, that is usually the correct route.

3. On SRA Authorisation

In rare cases, the SRA may authorise a withdrawal, for example, to pay unclaimed balances to charity after reasonable steps to return the money to the client have failed.

Alongside case‑by‑case authorisations, the SRA prescribes circumstances in which firms may withdraw residual client balances of £500 or less without prior authorisation, provided they (a) have taken reasonable steps to identify and trace the rightful owner and to return the funds, (b) pay the sum to an appropriate charity, and (c) keep a central record and detailed file notes of the steps taken and the payment. For balances over £500, prior SRA approval is required.

4. Returning Surplus Client Money

When there is no longer a proper reason to hold client money, it must be returned promptly to the client or third party. Withdrawals for this purpose are permitted. Delays are not justified by administrative convenience or the absence of a bill; the duty to return promptly is independent.

If a client cannot be located, reasonable steps must be taken to trace them. Only if those steps fail should the firm use the prescribed charity process within the monetary limit or seek specific SRA authorisation for larger sums.

5. Payment of the Firm’s Costs After a Bill

A firm may transfer money from the client account to the business account to pay its own costs, but only after delivering a bill or written notification of costs to the client. The amount withdrawn must match the specific sum billed and be covered by the balance held for that client. The correct accounting treatment is a client‑to‑business cash transfer comprising two double entries:

payment out of client account: DR client ledger (client column); CR cash sheet (client column)
receipt into business account: DR cash sheet (business column); CR client ledger (business column)

If a bill includes anticipated disbursements that have not yet been incurred or paid, SRA guidance permits leaving those amounts in the client account until they are paid (rather than transferring to business), to protect clients from the risks associated with holding such sums in office money.

Key Term: bill of costs
A written statement sent to the client detailing the firm’s professional fees and any disbursements incurred.

6. Reimbursement for Disbursements Paid by the Firm

If the firm has paid a disbursement from its own funds for a client, it may withdraw client money to reimburse itself, provided the payment is properly documented and the client has been informed. This typically applies where money was held “on account of costs and disbursements” and the retainer or terms of engagement explain that such funds may be used to reimburse paid disbursements. The withdrawal must be limited to the amount actually paid and must not be used to reimburse anticipated (unpaid) items unless and until they are incurred and, if applicable, billed.

Where a disbursement invoice is addressed to the firm (principal method), the firm pays from business money and then: (a) if a bill has been delivered, can transfer the reimbursable amount from the client account to business; (b) if money is held generally on account and the item has been paid, can reimburse from client funds held for that purpose in line with the firm’s terms and the SRA guidance.

Authorisation and Supervision of Withdrawals

All withdrawals from a client account must be appropriately authorised and supervised. The firm’s managers and the Compliance Officer for Finance and Administration (COFA) are responsible for ensuring that only suitably trained and senior staff can authorise withdrawals. Procedures must be in place to minimise the risk of error or misuse.

Effective controls usually include:

segregation of duties (e.g., preparation by one person, approval by a manager or COFA, and execution by another, with audit trails)
dual authorisation for electronic payments, with role‑based access to online banking and secure token controls
pre‑payment checks against the client ledger to confirm a sufficient cleared balance exists and that the purpose of payment is permitted
post‑payment review and timely posting of entries, with daily or near‑daily updates to accounting records
five‑weekly reconciliations between bank statements, cash book and client ledger totals, signed off by the COFA or a manager, with prompt investigation and resolution of discrepancies
clear narrative descriptions in ledgers and cash sheets identifying the matter, payee, purpose, and cross‑references to bills or third‑party invoices

Key Term: Compliance Officer for Finance and Administration (COFA)
The person in a law firm responsible for ensuring compliance with the SRA Accounts Rules, especially regarding the handling of client money.

Sufficient Funds Requirement

A firm must not withdraw more client money for a client than is held for that client in the client account. Before making any withdrawal, the firm must check the client’s ledger to confirm there is a sufficient credit balance. Using money belonging to other clients is a breach of the rules.

Practically, treat “cleared funds” as the benchmark. Do not make payments out against uncleared cheques; if a client’s cheque later bounces and the firm has already paid a third party from the general client account, that payment has come from other clients’ money. The breach must be corrected immediately by replacing the shortfall from the business account, and the firm should consider changes to prevent recurrence, such as waiting for clearance or asking clients to pay by faster electronic means.

If there is an urgent need to pay and the client balance is slightly short, the firm may choose to advance a small sum from business to client account to complete the payment. Once receipted from the client, the firm can repay the advance by making a client‑to‑business cash transfer. Any such advance is discretionary, should be documented, and becomes client money once placed in the client account.

Worked Example 1.1

A firm is holding £2,000 in its client account for Client A. The firm needs to pay a disbursement of £2,500 for Client A. Can the firm make the payment from the client account?

Answer:
No. The firm cannot pay more than the £2,000 held for Client A. The payment must be made from the business account, or the firm may advance £500 of its own money to the client account to cover the shortfall. The client will then owe the firm £500.

Worked Example 1.2

A client asks the firm to hold £10,000 in the client account for several months and to make monthly payments to the client’s landlord for rent. The firm is not acting in any legal matter related to the tenancy. Is this permitted?

Answer:
No. The firm cannot use the client account as a banking facility for the client’s convenience. The money must be returned to the client.

Worked Example 1.3

A probate matter is complete and all liabilities have been paid. The firm is holding £500 for a beneficiary who cannot be traced. What should the firm do?

Answer:
The firm must make reasonable efforts to locate the beneficiary. If unsuccessful, and the amount is £500 or less, the firm may pay the balance to charity following the SRA’s prescribed procedure and keep records of the steps taken.

Worked Example 1.4

You hold £1,000 on account of costs and disbursements. You have paid the client’s search fees of £300 from the business account (invoice addressed to the client). May you reimburse £300 from client funds without first sending a bill?

Answer:
Yes, if your terms explain that money on account may be used to reimburse paid disbursements, and the £1,000 is held for that purpose. Record the reimbursement with clear ledger narratives. Do not reimburse anticipated items not yet paid.

Worked Example 1.5

A developer client asks you to retain surplus sale proceeds and make a series of payments unrelated to any current retainer, including paying a consultant’s car deposit and unrelated site costs. Is that permissible?

Answer:
No. These payments are not sufficiently connected to the delivery of regulated legal services. Retaining and circulating funds in this way risks breaching the prohibition on using client account as a banking facility. Surplus should be returned to the client.

Worked Example 1.6

A client pays a £5,000 cheque “on account”. The firm receives it and, the same day, pays counsel’s £2,000 fee from client account. The cheque then bounces. What is the position?

Answer:
There is a breach because the counsel’s payment used other clients’ money. The firm must immediately replace the £2,000 shortfall from the business account and review controls (e.g., wait for clearance or seek electronic payments) to prevent recurrence.

Prohibition on Using Client Account as a Banking Facility

A client account must not be used to provide banking facilities for clients or third parties. Payments into and out of the client account must relate to the delivery of regulated legal services. Convenience or client request alone is not a valid reason.

This prohibition is enforced strictly. Illustrative decisions have sanctioned firms that allowed large sums unrelated to legal work to pass through client accounts, or that made payments at a client’s behest when there was no proper link to legal services. Typical risk flags include: holding proceeds long after a transaction has completed, making payments between client‑connected entities for non‑legal reasons, and splitting payments to unrelated third parties (for example, car dealers) without a connected legal purpose.

Exam Warning

Using a client account to process funds for reasons unrelated to legal services—such as paying a client’s personal bills or holding money for convenience—is a serious breach and may result in disciplinary action.

Returning Client Money Promptly

When there is no longer a proper reason to hold client money, it must be returned to the client or third party without delay. If the retainer has concluded and no further legal services are required, return the funds rather than retaining them against potential future instructions.

If the client cannot be located:

make reasonable efforts to trace them (write to last known address and email, telephone, check public registers, contact referrers)
document steps taken and the rationale
if the amount is £500 or less, consider paying to an appropriate charity in accordance with the SRA’s prescribed conditions and keep a central register
if over £500, apply to the SRA for authorisation to withdraw and pay to charity

Interest or a fair sum in lieu of interest due to the client should also be dealt with in line with the firm’s interest policy. Where interest has been calculated as payable, effect a business‑to‑client cash transfer to place that sum into the client account (or pay it directly to the client) before final remittance.

Correcting Breaches

If a withdrawal is made in breach of the rules (for example, if a cheque bounces or too much is withdrawn), the firm must correct the breach immediately. This usually means replacing the money in the client account from the business account.

Practical breach‑correction steps:

stop further payments and quantify the shortfall
transfer the required amount from business to client account immediately to restore the client balance
post accurate journal entries to reflect the correction
log the breach on the firm’s breach register, investigate root cause and implement remedial measures (process change, additional training, sign‑off controls)
consider whether the breach is material for reporting to the SRA in line with the firm’s reporting obligations

Revision Tip

Always check the client ledger before making a withdrawal. Never assume that funds are available without confirming the balance.

Key Point Checklist

This article has covered the following key knowledge points:

Withdrawals from client accounts are only permitted for specific reasons set out in the SRA Accounts Rules.
All withdrawals must be properly authorised and supervised by suitably trained staff.
The firm must ensure sufficient funds are held for the relevant client before making a withdrawal.
Client accounts must not be used as banking facilities for clients or third parties.
Surplus client money must be returned promptly to the client or third party.
Any breach of the rules must be corrected immediately, usually by replacing the money from the business account.
Payment of the firm’s costs from client money is permitted only after a bill or written notification of costs has been delivered, for the exact amount billed.
Paid disbursements may be reimbursed from client funds held for that purpose where the firm’s terms and SRA guidance are satisfied.
Residual client balances may be paid to charity within prescribed limits following reasonable tracing steps and with proper records, otherwise SRA authorisation is required.

Key Terms and Concepts

client account
client money
bill of costs
Compliance Officer for Finance and Administration (COFA)

Client accounts - Permitted withdrawals from client accounts