Client money - Definition of client money

Learning Outcomes

This article explains the definition of 'client money' according to the SRA Accounts Rules 2019. After studying this material, you should be able to identify different categories of client money and distinguish client money from money belonging to the firm (business money). This understanding is fundamental for applying the SRA Accounts Rules correctly in various practical scenarios relevant to the SQE1 assessment. Your ability to differentiate these money types is essential for answering questions on client account management and compliance.

SQE1 Syllabus

For SQE1, you are required to have a precise understanding of what constitutes client money. This knowledge underpins the application of almost all other SRA Accounts Rules. It is essential for managing client accounts correctly and ensuring compliance.

As you work through this article, remember to pay particular attention in your revision to:

• the definition of client money as set out in Rule 2.1 of the SRA Accounts Rules 2019
• the four main categories of client money
• the distinction between client money and money belonging to the firm (business money)
• examples of money that fall into each category, particularly in common legal transactions.

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 is generally considered client money under the SRA Accounts Rules 2019?
   1. Money received from a client specifically in payment of a bill already delivered by the firm.
   2. Money received from a client to reimburse the firm for a disbursement already paid out of the firm's own business account.
   3. Money received from a client on account of costs and disbursements not yet billed.
   4. Interest earned on the firm's general business bank account.
2. A solicitor acts as a Court of Protection deputy for Peter. The solicitor receives money belonging to Peter as part of managing his financial affairs. How should this money be classified under the SRA Accounts Rules 2019?
   1. Business money
   2. Client money under Rule 2.1(c)
   3. Office money
   4. Out-of-scope money
3. A firm receives a single payment from a client which includes £500 for costs already billed and £2,000 as funds required for a property purchase completion. Which category best describes this receipt?
   1. Entirely business money
   2. Entirely client money
   3. A mixed payment containing both business and client money
   4. Stakeholder money

Introduction

A fundamental aspect of solicitors' accounts is the correct identification and handling of money received by the firm. The Solicitors Regulation Authority (SRA) Accounts Rules 2019 ('the Rules') establish strict requirements for dealing with money belonging to clients and others, distinct from the firm's own funds. The primary purpose is to safeguard money entrusted to the firm. Central to this is understanding the definition of 'client money'. Failure to correctly identify and handle client money can lead to serious breaches of the Rules and disciplinary action. This article focuses specifically on Rule 2 of the SRA Accounts Rules 2019, which defines client money.

Defining Client Money (Rule 2.1)

The Rules require client money to be kept separate from money belonging to the firm (Rule 4.1). Therefore, distinguishing between the two is essential.

Key Term: Client Money
Rule 2.1 defines client money as money held or received by a firm relating to regulated services delivered to a client; on behalf of a third party in relation to regulated services; as a trustee or holder of a specified office or appointment; or in respect of fees and unpaid disbursements prior to delivery of a bill.

Key Term: Business Money
Money that belongs to the firm itself, as opposed to money held for clients or third parties. This includes money received in payment of delivered bills or reimbursement for disbursements already paid by the firm.

Rule 2.1 provides four main categories under which money held or received by a firm constitutes client money:

1. Money Relating to Regulated Services (Rule 2.1(a))

This is the most common category. It covers money held or received for a client in the context of the legal services being provided.

Key Term: Regulated Services
Legal and other professional services provided by a firm that are regulated by the SRA. This includes acting as a trustee or holder of a specified office.

Worked Example 1.1

A firm acts for Sarah in the purchase of a house. Sarah transfers £250,000 to the firm, which represents the purchase price to be paid to the seller on completion. Is this client money?

Answer: Yes. The £250,000 relates directly to the regulated service (conveyancing) being delivered by the firm to the client (Sarah). It falls under Rule 2.1(a).

2. Money Held for Third Parties (Rule 2.1(b))

This category covers money held or received by the firm on behalf of someone other than the client, but in relation to the regulated services being provided. Common examples include:

• Stakeholder Money: Such as a deposit held in a property transaction on behalf of both buyer and seller until completion.
• Agent Money: Money held as agent for a third party.
• Money Held to Sender's Order: Funds received from a third party with instructions to hold them until the sender consents to their release.

Worked Example 1.2

A firm acting for the seller in a property transaction receives a 10% deposit from the buyer's solicitor, to be held as stakeholder pending completion. How is this deposit money classified?

Answer: This is client money under Rule 2.1(b). Although the firm's client is the seller, the money is held on behalf of a third party (the buyer, jointly with the seller) in relation to the conveyancing service.

3. Money Held as Trustee or Office Holder (Rule 2.1(c))

This applies when a solicitor or firm holds money due to a specific role they occupy, such as:

• Trustee of a trust.
• Executor or administrator of an estate (though often handled through specific estate accounts).
• Donee of a power of attorney.
• Court of Protection deputy.
• Trustee of an occupational pension scheme.

The money belongs to the trust, estate, donor, or person lacking capacity, not the firm.

4. Money for Fees and Unpaid Disbursements Pre-Bill (Rule 2.1(d))

This category covers money received from a client specifically intended to cover the firm's future fees or disbursements that the firm has not yet paid.

Key Term: Fees
The firm's own charges or profit costs (including VAT) for legal services provided.

Key Term: Disbursements
Costs or expenses paid or to be paid to a third party on behalf of the client or trust (e.g., court fees, counsel's fees, search fees), excluding general office overheads like postage.

Importantly, money received from a client before a bill is delivered for those specific costs is client money. Once a bill covering those specific fees or disbursements has been delivered, money received expressly for that bill becomes business money. Similarly, money received to reimburse the firm for a disbursement it has already paid using its own business money is business money, not client money.

Exam Warning

Distinguishing between money received for billed versus unbilled costs, and paid versus unpaid disbursements, is a frequent source of confusion. Money for costs/disbursements is client money only if received before a bill for those specific items is delivered, or if it relates to disbursements the firm has not yet paid. Money received after a bill is delivered for those items, or to reimburse already paid disbursements, is business money.

Worked Example 1.3

A firm requests £500 from a client on account of future costs. The client pays the £500 before any bill is issued. Later, the firm issues a bill for £300 profit costs and £50 for a Land Registry search fee which the firm paid yesterday from its business account. The client then sends a further £350 specifically stating it is to pay this bill. How is the initial £500 and the subsequent £350 classified?

Answer:

• The initial £500 received before the bill was delivered is client money under Rule 2.1(d). It must be paid into the client account.
• The subsequent £350 is received after the bill was delivered and is specifically for payment of that bill. The £300 element for profit costs is business money. The £50 element is also business money because it reimburses a disbursement already paid by the firm. Therefore, the entire £350 is business money and should be paid into the business account.

Distinguishing from Business Money

Correctly identifying client money requires distinguishing it from the firm's own business money. Business money includes:

• Money belonging solely to the firm (e.g., capital contributions from partners, loans taken out by the firm).
• Money received in payment of a bill already delivered for fees and paid disbursements.
• Money received to reimburse the firm for disbursements already paid from the firm's business account.
• Interest earned on the firm's general client account (though a fair sum must be accounted for to clients – see Rule 7).

Understanding this distinction is critical for compliance with Rule 4.1 (keeping client money separate) and ensuring funds are paid into the correct bank account (client or business).

Key Point Checklist

This article has covered the following key knowledge points:

• Client money must be kept separate from the firm's business money.
• Rule 2.1 defines client money, which generally falls into four categories: money relating to regulated services, money held for third parties, money held as trustee/office holder, and money for unbilled fees/unpaid disbursements.
• Money received before a bill is delivered for specific costs is client money.
• Money received after a bill is delivered for specific costs, or to reimburse the firm for disbursements it has already paid, is business money.
• Money held as a stakeholder or agent for a third party is client money.
• Money held by a solicitor acting under a power of attorney or as a Court of Protection deputy is client money.
• Distinguishing between client money and business money is essential for compliance with the SRA Accounts Rules.

Key Terms and Concepts

• Client Money
• Business Money
• Regulated Services
• Fees
• Disbursements