Learning Outcomes
After reading this article, you will be able to identify and explain the main exceptions to the general rule that client money must be paid into a client account under the SRA Accounts Rules. You will understand when client money may be withheld from a client account, including the relevant rules for trustees, Legal Aid payments, and written client agreements. You will also be able to apply these principles to SQE1-style scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the circumstances in which client money may be withheld from a client account. In your revision, focus on:
- the general rule requiring prompt payment of client money into a client account
- the main exceptions to this rule, including trustee roles, Legal Aid payments, and written client agreements
- the specific requirements for documenting and justifying exceptions
- how to identify and apply these exceptions in practical scenarios
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 an exception to the requirement to pay client money promptly into a client account?
- Money received as a Legal Aid payment for the firm's costs
- Money held by a solicitor as a trustee, where another regulation applies
- Client money held under a written agreement with the client
- All of the above
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True or false? A solicitor can always agree verbally with a client to keep client money outside a client account.
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What must a firm do if it withholds client money from a client account under a written agreement with the client?
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In which situation is it acceptable to hold client money in a business account rather than a client account?
- When the money is received for unpaid disbursements
- When the only client money received is a Legal Aid payment for the firm's costs
- When the client is a close relative of the solicitor
- When the client requests it by email
Introduction
The SRA Accounts Rules require that client money is paid promptly into a client account to keep it safe and separate from the firm's own funds. However, there are specific exceptions where client money may be withheld from a client account. For SQE1, you must be able to identify these exceptions, understand the requirements for each, and apply them correctly in practice.
Key Term: client money
Money held or received by a law firm relating to regulated services for a client, on behalf of a third party, as a trustee or specified office holder, or for fees and unpaid disbursements before a bill is delivered.Key Term: client account
A bank or building society account in England or Wales, named to include the word "client," used solely for holding client money.Key Term: business account
An account used by a law firm for its own money, not for holding client money except in specific permitted circumstances.Key Term: Legal Aid payment
Money received from the Legal Aid Agency for the firm's costs, which may be treated differently from other client money under the SRA Accounts Rules.Key Term: written client agreement
A written arrangement between a firm and a client (or third party) specifying that client money will be held other than in a client account, as permitted by the SRA Accounts Rules.
Exceptions to the General Rule
The General Principle
The default position is that all client money must be paid promptly into a client account. This protects client funds and ensures transparency.
Main Exceptions
There are three main exceptions where client money may be withheld from a client account:
1. Trustee or Specified Office Holder Roles
If a solicitor is acting as a trustee, donee of a power of attorney, Court of Protection deputy, or similar, and another regulation or obligation applies to the handling of money, client money may be withheld from a client account if paying it in would conflict with those obligations.
Key Term: trustee
A person or firm holding money or assets for another under a trust arrangement, with specific duties and obligations.
Worked Example 1.1
A solicitor is appointed as a Court of Protection deputy for a client lacking capacity. The Office of the Public Guardian requires the deputy to use a separate deputyship account for the client's funds. Should the solicitor pay the client's money into the firm's client account?
Answer: No. The solicitor should follow the requirements of the Office of the Public Guardian and use a separate deputyship account, as paying the money into the firm's client account would conflict with those obligations.
2. Legal Aid Payments
If the only client money received is a payment from the Legal Aid Agency for the firm's costs, the firm is not required to pay this money into a client account. Instead, it may be paid directly into the business account.
Key Term: Legal Aid Agency (LAA)
The government body responsible for funding legal services for eligible clients in England and Wales.
Worked Example 1.2
A firm receives a payment from the Legal Aid Agency for its costs in a criminal case. The firm does not hold any other client money. Must this payment be paid into a client account?
Answer: No. If the only client money received is a Legal Aid payment for the firm's costs, it may be paid directly into the business account and does not need to pass through a client account.
3. Written Client Agreement
A firm may agree in writing with a client (or third party) to hold client money other than in a client account. This agreement must be made in advance, be in writing, and the client must be given sufficient information to make an informed decision.
Key Term: written client agreement
A written arrangement with a firm and a client or third party, made in advance, allowing client money to be held outside a client account in accordance with the SRA Accounts Rules.
Worked Example 1.3
A client instructs a firm to hold £50,000 for a future transaction. The client agrees in writing that the money will be held in a third-party managed account rather than the firm's client account. Is this permitted?
Answer: Yes. If the agreement is made in advance, is in writing, and the client has been given sufficient information, the firm may hold the money in a third-party managed account instead of a client account.
Requirements for Withholding Client Money
If a firm withholds client money from a client account under any of these exceptions, it must:
- ensure the exception applies and is documented
- keep clear records of the money and the reason for withholding it
- return the money promptly when there is no longer a proper reason to hold it
Exam Warning
If a firm withholds client money from a client account without meeting the requirements of an exception, this is a breach of the SRA Accounts Rules and may lead to disciplinary action.
Other Situations
Joint Accounts and Client's Own Accounts
Money held in a joint account with a client or in a client's own account (operated by the solicitor as signatory) is not required to be paid into a client account, but specific record-keeping and reconciliation requirements apply.
Third-Party Managed Accounts
A firm may use a third-party managed account (TPMA) instead of a client account if agreed in writing with the client. The TPMA provider must be regulated, and the client must be fully informed of the arrangement.
Worked Example 1.4
A firm occasionally holds client money and decides to use a regulated third-party managed account for all such transactions. The client agrees in writing. Is this compliant?
Answer: Yes, provided the TPMA is properly regulated and the client has been given sufficient information to make an informed choice, this is permitted under the SRA Accounts Rules.
Key Point Checklist
This article has covered the following key knowledge points:
- The general rule is that client money must be paid promptly into a client account.
- Client money may be withheld from a client account if the solicitor is acting as a trustee or specified office holder and another regulation applies.
- Legal Aid payments for the firm's costs may be paid into the business account if no other client money is held.
- A written agreement with the client or third party, made in advance, can allow client money to be held outside a client account.
- Written agreements must be clear, in writing, and provide sufficient information for informed consent.
- Firms must keep clear records and return client money promptly when there is no longer a proper reason to hold it.
- Using an exception without meeting the requirements is a breach of the SRA Accounts Rules.
Key Terms and Concepts
- client money
- client account
- business account
- Legal Aid payment
- written client agreement
- trustee
- Legal Aid Agency (LAA)
