Learning Outcomes
This article outlines the core obligations for solicitors regarding the repayment of client money held in a client account. After reading this article, you should understand the requirements under the SRA Accounts Rules 2019 for promptly returning client funds, the circumstances under which withdrawals for repayment are permitted, and the procedures for dealing with residual balances where clients cannot be traced. This knowledge is essential for applying the rules correctly in practice and for answering related questions in the SQE1 assessment.
SQE1 Syllabus
For SQE1, you are required to understand the practical application of the SRA Accounts Rules 2019 concerning the handling and repayment of client money. This includes knowing when client money must be returned and the procedures involved. Your understanding will be tested through scenarios requiring you to apply these rules.
As you work through this article, remember to pay particular attention in your revision to:
- the duty to return client money promptly when there is no longer a proper reason to hold it (Rule 2.5)
- the circumstances in which withdrawals from a client account are permitted for repayment (Rule 5.1)
- the requirement to hold sufficient funds for the specific client before making a withdrawal (Rule 5.3)
- the procedures for dealing with residual balances where the client cannot be traced (Rule 20)
- the connection between holding client money unnecessarily and the prohibition on providing banking facilities (Rule 3.3).
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.
-
Under which SRA Accounts Rule must client money be returned promptly when there is no longer a proper reason to retain it?
- Rule 3.3
- Rule 4.1
- Rule 2.5
- Rule 5.1
-
A firm holds £450 in its client account for Client A after their matter concluded six months ago. Despite reasonable efforts, the firm cannot trace Client A. What can the firm do with the £450 without SRA authorisation?
- Transfer it to the firm's business account.
- Pay it to any charity.
- Keep it in the client account indefinitely.
- Pay it to a charity that provides an indemnity against future claims.
-
Before repaying client money, what is the key check required by Rule 5.3?
- Confirming the client's identity.
- Ensuring sufficient funds are held for that specific client.
- Obtaining written authorisation from the client.
- Reconciling the client account statement.
Introduction
A fundamental principle of handling client money is that it does not belong to the firm and must be safeguarded. Part of this stewardship involves returning the money to the client or rightful owner when it is no longer needed for the purpose for which it was held. The SRA Accounts Rules 2019 (the 'Rules') set out clear obligations regarding the repayment of client money. Understanding these obligations is essential for compliance and maintaining client trust. This article examines the key rules governing the timing, authorisation, and process for repaying client money.
Key Term: client money
Money held or received by a firm relating to regulated services, including money held for a client, on behalf of a third party, as a trustee, or for fees and unpaid disbursements prior to a bill being delivered (Rule 2.1).
The Duty to Return Client Money Promptly
Rule 2.5 states: "You ensure that client money is returned promptly to the client, or the third party for whom the money is held, as soon as there is no longer any proper reason to hold those funds."
This rule establishes a positive obligation on firms to proactively return funds once the legal matter or the specific purpose for holding the money has concluded.
Key Term: promptly
This term is not defined in the Rules, but SRA guidance suggests it means as soon as reasonably possible in the circumstances. Unnecessary delay is a breach of the Rules.
Holding client money without a proper reason can also risk breaching Rule 3.3, which prohibits using a client account to provide banking facilities. If money is retained long after the matter has concluded, the firm may be seen as offering a banking service rather than holding funds incidental to legal services.
Worked Example 1.1
A firm acted for Client B in a litigation matter which settled two months ago. The firm received settlement funds into the client account and, after deducting its billed fees, a balance of £5,000 remains for Client B. The client has not provided instructions on where to send the funds despite requests. Can the firm continue holding the £5,000 indefinitely?
Answer: No. Under Rule 2.5, the firm must return the £5,000 promptly as there is no longer a proper reason (related to the concluded litigation) to hold it. The firm should continue efforts to obtain payment details from Client B but cannot hold the funds indefinitely. Prolonged retention could breach Rule 2.5 and potentially Rule 3.3.
Authorised Withdrawals for Repayment
Repaying client money involves withdrawing it from the client account. Rule 5.1 governs withdrawals and permits them only under specific circumstances:
- (a) for the purpose for which it is being held: This covers situations where the money was held specifically to be paid out, although repayment to the client often falls under (b).
- (b) following receipt of instructions from the client, or the third party for whom the money is held: This is the usual basis for repaying the client at the end of a matter or when funds are no longer required.
- (c) on the SRA’s prior written authorisation or in prescribed circumstances: This applies mainly to residual balances where the client cannot be traced (see below).
Importantly, Rule 5.3 states: "You only withdraw client money from a client account if sufficient funds are held on behalf of that specific client or third party to make the payment." Before making a repayment, the firm must check the specific client ledger to ensure the balance covers the repayment amount. Using funds held for Client X to make a repayment to Client Y is a serious breach.
Key Term: client ledger
An accounting record maintained by the firm for each individual client (and often for each matter for that client) showing all the transactions involving client money and business money relating to that client/matter.
Worked Example 1.2
A firm holds £1,500 for Client C in its general client account. The client requests the return of this money. The firm’s cashier checks the client ledger and confirms the £1,500 balance. However, due to an accounting error last week, £200 belonging to Client D was accidentally withdrawn from Client C's ledger balance (though this hasn't been corrected yet). The ledger shows £1,500, but the actual money held for Client C is only £1,300. Can the firm repay £1,500 to Client C?
Answer: No. Despite the ledger showing £1,500, the firm only holds £1,300 for Client C. Repaying £1,500 would involve using £200 of other clients' money, breaching Rule 5.3. The firm must first correct the accounting error by replacing the £200 improperly withdrawn (Rule 6.1), likely from the business account, before repaying the full £1,500 to Client C.
Accounting for Interest Before Repayment
Before making a final repayment to a client, the firm must ensure it has accounted for any interest due on the client money held, in accordance with Rule 7. Rule 7.1 requires firms to account for a fair sum of interest unless agreed otherwise in writing (Rule 7.2). The firm’s interest policy will determine the amount and method. Any interest due must be calculated and paid (often by transferring it from the business account to the client account) before the final balance is repaid to the client.
Dealing with Residual Balances
Sometimes, usually at the end of a matter, a small balance of client money remains, and the firm cannot trace the client despite reasonable efforts. Rule 20 sets out procedures for dealing with such residual balances.
- Balances up to £500: Rule 20.1(j) allows withdrawal without SRA authorisation if the firm has made reasonable attempts to trace and return the money, pays the funds to a charity, and keeps detailed records (Rule 20.2). The charity does not need to provide an indemnity.
- Balances over £500: Rule 20.1(k) requires the firm to obtain prior written authorisation from the SRA before withdrawing the money. The SRA may impose conditions, such as requiring payment to a charity that provides an indemnity against future claims.
Exam Warning
Be clear on the distinction between the procedures for residual balances under and over £500. Note that for balances under £500 paid to charity, no SRA authorisation is needed, and no indemnity is required from the charity. For balances over £500, SRA authorisation is mandatory.
Record Keeping
All repayments of client money must be accurately recorded in the firm's accounting records in accordance with Rule 8. This includes entries on the relevant client ledger (debiting the client section) and the client cash account (crediting the client section) to reflect the payment out of the client account.
Key Point Checklist
This article has covered the following key knowledge points:
- Firms must return client money promptly when there is no longer a proper reason to hold it (Rule 2.5).
- Holding client money unnecessarily long may breach Rule 3.3 (prohibition on providing banking facilities).
- Withdrawals for repayment must be authorised under Rule 5.1 (usually client instructions).
- Before repayment, firms must ensure sufficient funds are held for that specific client (Rule 5.3).
- Interest due under Rule 7 must be accounted for before final repayment.
- Specific procedures under Rule 20 apply to residual balances where the client cannot be traced, with different rules for amounts under and over £500.
- All repayments must be accurately recorded in the accounting records (Rule 8).
Key Terms and Concepts
- client money
- promptly
- client ledger
