Learning Outcomes
After reading this article, you will be able to identify when withdrawals from a client account are permitted under the SRA Accounts Rules, explain the requirements for authorisation and supervision, distinguish between proper and improper withdrawals, and apply the correct procedures for returning client money or paying third parties. You will also understand the importance of accurate record-keeping and the consequences of breaching the rules.
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. In your revision, focus on:
- 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
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 is a permitted reason for withdrawing money from a client account?
- to pay the firm’s professional fees after delivering a bill
- to pay a client’s personal utility bills for convenience
- to transfer surplus funds to the business account without client authorisation
- to make a payment to a third party unrelated to legal services
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What must a firm check before making a withdrawal from a client account for a specific client?
- that the client has a positive balance in the business account
- that sufficient funds are held for that client in the client account
- that the withdrawal is for the firm’s convenience
- that the client has no outstanding bills
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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.
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.
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.
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.
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.
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 sum billed.
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.
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.
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.
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.
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.
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.
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.
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 client cannot be located, the firm must take reasonable steps to trace them. For small unclaimed balances, the SRA may allow payment to charity.
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.
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.
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.
Key Terms and Concepts
- client account
- client money
- bill of costs
- Compliance Officer for Finance and Administration (COFA)
