Client money - Exceptions: circumstances when client money m...

Learning Outcomes

This article explains the main exceptions to the general rule that client money must be paid into a client account under the SRA Accounts Rules. It covers when client money may be withheld from a client account, including trustee roles, Legal Aid payments, and written client agreements, and how these principles apply 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, with a focus on the following syllabus points:

• 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
• the limited circumstances in which a firm need not operate a client account at all (Rule 2.2), and how this differs from Rule 2.3 exceptions
• the special treatment for joint accounts, a client’s own account, and third‑party managed accounts (TPMAs), including what records must still be kept

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 an exception to the requirement to pay client money promptly into a client account?
   1. Money received as a Legal Aid payment for the firm's costs
   2. Money held by a solicitor as a trustee, where another regulation applies
   3. Client money held under a written agreement with the client
   4. All of the above

2. True or false? A solicitor can always agree verbally with a client to keep client money outside a client account.

3. What must a firm do if it withholds client money from a client account under a written agreement with the client?

4. In which situation is it acceptable to hold client money in a business account rather than a client account?
   1. When the money is received for unpaid disbursements
   2. When the only client money received is a Legal Aid payment for the firm's costs
   3. When the client is a close relative of the solicitor
   4. 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. Promptly is not defined in the Rules; in practice, it usually means on the day of receipt or the next working day, taking account of the firm’s systems and the nature of the receipt. In addition, client money should be available on demand unless a different approach has been agreed in writing with the client or relevant third party.

A firm must not use the client account to provide banking facilities for clients or third parties. Even when an exception allows funds to be kept outside a client account, the arrangement must be connected to the delivery of regulated services and must not be used to route or warehouse money for convenience.

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. In practice, deputies typically use a dedicated deputyship or Court Funds Office account, and attorneys may operate the donor’s own bank account as signatory, rather than placing funds into the firm’s client account.

Key Term: trustee
A person or firm holding money or assets for another under a trust arrangement, with specific duties and obligations.

Firms should document why the dedicated arrangement is required, keep statements regularly, and ensure withdrawals are appropriately authorised. Where operating a client’s own account as signatory (for example, under a lasting power of attorney), statements should be obtained and reconciled at least every five weeks where this is practicable, with a central record of bills or written notifications of costs kept.

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. This is a narrow exception: it is limited to payments for the firm’s costs, not generally to any other sums. Where Legal Aid receipts include provision for counsel or experts, there is no rule-imposed deadline to transfer such elements out to a client account, but the firm must not delay payment to third parties in a way that prejudices the client’s matter.

Key Term: Legal Aid Agency (LAA)
The government body responsible for funding legal services for eligible clients in England and Wales.

This Legal Aid exception should be distinguished from the separate, broader Rule 2.2 scenario discussed further below, where a firm that does not otherwise hold client money may not need a client account at all.

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. The arrangement must remain connected to the delivery of regulated legal services and must not be used to provide general banking facilities.

Examples include using a regulated third‑party managed account (TPMA) or, in limited cases, agreeing to hold funds in a designated non‑client account where the client’s needs and the nature of the legal work justify it. Firms must retain a clear audit trail of the client’s informed consent.

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.

A further limited scenario: firms that do not operate a client account (Rule 2.2)

Separately from the three Rule 2.3 exceptions, a small number of firms may fall within Rule 2.2. Where the only client money a firm receives is money for its own fees and unpaid disbursements prior to delivery of a bill, and the firm does not otherwise maintain a client account, it may hold that money outside a client account, provided the client has been told in advance where and how the money will be held. Any disbursement covered by this exception must be one for which the firm is liable (for example, counsel’s fee where the firm has instructed counsel). If the firm later needs to receive other types of client money (such as completion funds or damages), it must open and operate a client account.

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.

Worked Example 1.5

A niche criminal practice receives only payments from the Legal Aid Agency for its costs and takes no other client money. The partners want to avoid opening a client account. Can they do so?

Answer:
Yes. Where the only client money received is LAA costs, they may pay such receipts into the business account and operate without a client account. If they later receive other client money (for example, private client on‑account payments for disbursements), they would need to reassess and, if necessary, open a client account.

Worked Example 1.6

A small advisory firm takes £800 on account of its fees and an anticipated disbursement for a search it will order on the client’s behalf. The firm does not have a client account and informs the client in writing that it will hold the money in its business account until billing. Is this within the Rules?

Answer:
Potentially, yes—if Rule 2.2 applies. This is permissible only if (i) the firm does not operate a client account for any other reason, (ii) the only client money it receives is money on account of its own fees and unpaid disbursements for which the firm is liable, and (iii) the client was informed in advance where and how the money will be held. If any other category of client money is received, the firm must operate 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
• ensure that any alternative arrangement is connected to the delivery of regulated services (and does not amount to providing banking facilities)
• monitor and reconcile statements regularly where operating joint accounts or a client’s own account as signatory, and retain a central record of bills
• retain written evidence of the client’s informed consent where relying on a written client agreement or TPMA

Where a firm genuinely falls within Rule 2.2 and therefore does not operate a client account, some of the client‑account operational rules (for example, availability on demand and client‑account reconciliations) do not apply. Nonetheless, the firm remains responsible for safeguarding money and assets entrusted by clients and for maintaining accurate accounting records.

A practical compliance point concerns accountants’ reports: an accountant’s report is not required for an accounting period if all client money held or received during the period is money received from the Legal Aid Agency, or where the total balance of all client accounts does not exceed the prescribed de minimis thresholds. This interacts with the above exceptions and can be relevant where a firm considers whether it needs to operate a client account at all.

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.

Also remember the prohibition on using the client account to provide banking facilities. An otherwise valid written client agreement cannot legitimise arrangements that are unconnected to regulated legal services or that simply route funds between parties for convenience.

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. At a minimum, statements should be obtained at least every five weeks. For a client’s own account operated by the solicitor, reconciliations should also be completed at least every five weeks where practicable, and a central record of bills or written notifications of costs must be kept. The overarching duty to act in the client’s best interests and to safeguard money applies.

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 should be properly regulated (typically by the Financial Conduct Authority). Firms should notify the SRA that a TPMA is in use, ensure clients are fully informed of the arrangement—including fees and who bears them—and obtain regular statements from the TPMA. Money held in a TPMA is held by the TPMA provider, so it is not “client money” for the purposes of the Accounts Rules; however, firms must still keep accurate internal records to reconcile TPMA statements to matters.

Key Term: third‑party managed account (TPMA)
An account operated by a regulated third‑party provider that holds funds for a firm’s clients in connection with legal services, under a written agreement with the client.

Worked Example 1.7

A firm opens a joint executor account with a lay co‑executor for estate funds rather than paying receipts into the firm’s client account. What must the firm still do?

Answer:
The firm can use the joint account. It must obtain statements at least every five weeks, keep a central record of bills or written notifications of costs related to the matter, and maintain records sufficient to show the position of funds. The duty to safeguard estate money and to authorise withdrawals appropriately remains.

Practical boundaries and common pitfalls

• A written client agreement must be specific, advance, and informed. Blanket provisions in standard terms are risky and can be invalid if they do not genuinely meet the client’s needs in the context of regulated services.
• Do not conflate the Legal Aid exception with private work. Money received from third parties to fund future disbursements in non‑Legal Aid matters is client money unless the Rule 2.2 conditions are satisfied and no client account is required for any other reason.
• Using any account (whether business, TPMA, joint, or the client’s own) to pay personal outgoings or to warehouse funds for convenience risks breaching the prohibition on banking facilities.
• Return funds promptly once the legal purpose ends. If a client cannot be traced after reasonable steps, firms can follow the prescribed residual balance process (including small balances to charity in approved circumstances), but must keep the required records.

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, if the client is given sufficient information to consent.
• Apart from Rule 2.3 exceptions, a firm that only receives money on account of its own fees and unpaid disbursements (for which it is liable) and otherwise holds no client money may not need a client account (Rule 2.2), if clients are told in advance where and how money will be held.
• 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.
• Joint accounts, client’s own accounts and TPMAs sit outside the usual client‑account framework, but they carry their own record‑keeping and reconciliation requirements.
• The client account must not be used to provide banking facilities; exceptions cannot be used to justify unconnected movements of money.
• In limited cases (e.g., only LAA costs receipts), an accountant’s report may not be required, but firms remain responsible for safeguarding money and maintaining proper records.

Key Terms and Concepts

• client money
• client account
• business account
• Legal Aid payment
• written client agreement
• trustee
• Legal Aid Agency (LAA)
• third‑party managed account (TPMA)