Client money - Requirement to pay client money into a client account

Learning Outcomes

This article explains the fundamental requirement under the SRA Accounts Rules 2019 to pay client money promptly into a client account. After reading this article, you will understand the definition of client money, the characteristics of a client account, the exceptions to the prompt payment rule, and the basic accounting entries involved. This knowledge will assist you in applying the SRA Accounts Rules correctly in practical scenarios relevant to the SQE1 assessment.

SQE1 Syllabus

For SQE1, you are required to understand the definition of client money and the core obligation to pay it into a client account. This includes recognising exceptions to the general rule and understanding the implications for compliance. Your revision should focus on:

• The definition and categories of client money (Rule 2.1).
• The requirement to pay client money into a client account promptly (Rule 2.3).
• Circumstances in which client money may be withheld from a client account (Rules 2.2, 2.3(a)-(c)).
• The basic accounting entries required for receiving client money into a client account.
• The consequences of failing to pay client money into a client account promptly.

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 NOT considered client money under Rule 2.1 of the SRA Accounts Rules 2019?
   1. Money received from a client on account of costs before a bill has been delivered.
   2. Money received from a third party relating to services delivered by the firm to a client.
   3. Money received from a client in full payment of a bill already delivered.
   4. Money held by a solicitor acting as a trustee.
2. According to Rule 2.3 of the SRA Accounts Rules 2019, client money must generally be paid into a client account:
   1. Within 24 hours of receipt.
   2. Promptly.
   3. Within 14 days of receipt.
   4. Before the end of the next working day.
3. Under which circumstance might client money NOT need to be paid into a client account?
   1. When the client instructs the firm verbally to hold the money elsewhere.
   2. When the money received is solely for payment of an unpaid professional disbursement for which the firm is liable, and the firm does not otherwise operate a client account.
   3. When the amount received is less than £500.
   4. When the money is received as a deposit in a conveyancing transaction.

Introduction

One of the most fundamental obligations under the SRA Accounts Rules 2019 ('the Rules') is the proper handling of client money. A key element of this obligation is the requirement for firms to pay money belonging to clients or certain third parties into a specific type of bank account – the client account – without unnecessary delay. This ensures the protection and segregation of client funds from the firm's own money, upholding public trust and confidence in the profession. This article examines the definition of client money and the core requirement to pay it into a client account promptly.

Defining Client Money

Before understanding the payment obligation, it is essential to identify what constitutes 'client money'. Rule 2.1 of the Rules provides a definition.

Key Term: Client Money
Money held or received by a firm: (a) relating to regulated services delivered to a client; (b) on behalf of a third party in relation to regulated services delivered by the firm; (c) as a trustee or holder of a specified office or appointment; or (d) in respect of the firm's fees and any unpaid disbursements if held or received prior to delivery of a bill for the same.

This definition is broad and covers various scenarios, including money held for property purchases, settlement funds in litigation, or money received on account of costs before work is billed. It is distinct from 'business money', which belongs to the firm itself (e.g., money received in payment of a delivered bill).

The Requirement for Prompt Payment into a Client Account

The central requirement is stated in Rule 2.3: 'You ensure that client money is paid promptly into a client account' unless specific exceptions apply.

Key Term: Client Account
A bank or building society account held in England and Wales in the name of the authorised body, which must include the word 'client' in its title (Rule 3). Its primary purpose is to hold client money separately from the firm's business money.

Key Term: Promptly
The Rules do not define 'promptly'. It implies acting without undue delay in the circumstances. For electronic receipts, this might mean almost immediately or same-day transfer. For cheques or cash, it likely means deposit on the day of receipt or the next working day. Unnecessary delay constitutes a breach.

The obligation ensures that client funds are protected from the moment they come under the firm's control by being placed in a properly designated and regulated account.

Worked Example 1.1

A solicitor acting for a buyer in a conveyancing transaction receives a cheque for £50,000 from the client, representing the deposit and funds towards search fees requested 'on account'. The solicitor is busy and leaves the cheque in a locked desk drawer for three days before paying it into the firm's client account. Has the solicitor complied with the Rules?

Answer: No. The £50,000 constitutes client money (deposit and money on account of costs/disbursements under Rule 2.1(a) and (d)). Rule 2.3 requires client money to be paid into a client account promptly. Leaving the cheque in a drawer for three days constitutes an unnecessary delay and is therefore a breach of Rule 2.3.

Accounting Entries for Receipt

When client money is correctly paid into the client account, the firm must record this transaction using double-entry bookkeeping.

The standard entries are:

• Debit (DR) the client cash account (representing the increase of money in the client bank account).
• Credit (CR) the specific client ledger account (client side) (representing the amount the firm now holds for that specific client).

These entries ensure the firm's records accurately reflect the amount held for each client within the pooled client bank account.

Worked Example 1.2

A firm receives £5,000 via bank transfer into its client account from Client A on account of costs for an ongoing litigation matter. What are the correct accounting entries?

Answer:
DR Client Cash Account £5,000
CR Client Ledger Account: Client A (Client Side) £5,000

Exceptions to Paying Client Money into a Client Account

While the general rule is prompt payment into a client account, Rules 2.2 and 2.3 outline specific exceptions where this is not required:

• Rule 2.3(a): Conflict with Specified Office Obligations: If the money is held by the solicitor acting as a trustee or in another specified role (e.g., Court of Protection deputy) and the rules of that role conflict with paying the money into the firm's client account (e.g., requiring a separate trustee bank account), then the rule does not apply.
• Rule 2.3(b): Legal Aid Agency (LAA) Payments: Money received from the LAA specifically for the firm's costs can be paid directly into the firm's business account.
• Rule 2.3(c): Agreed Alternative Arrangement: The firm can agree in writing with the client (or relevant third party) to hold the money differently, provided the client gives informed consent. This might involve using a Third Party Managed Account (TPMA).
• Rule 2.2: Limited Exception for Fees/Disbursements Only: If a firm only receives client money that falls under Rule 2.1(d) (advance payment for fees and unpaid disbursements for which the firm is liable) AND the firm does not otherwise operate a client account for any other reason, the money does not need to be held in a client account, provided the client is informed in advance where and how the money will be held. This is a very narrow exception.

Revision Tip

Memorise the specific exceptions to the Rule 2.3 requirement. SQE questions often test the application of these exceptions in different factual scenarios. Be particularly careful with the narrow scope of Rule 2.2.

Worked Example 1.3

A firm acting solely in criminal defence receives its fees directly from the Legal Aid Agency. It also receives £200 from a privately paying client towards anticipated counsel's fees (an unpaid professional disbursement for which the firm is liable). The firm does not hold any other client money. Can the firm pay the £200 into its business account?

Answer: Yes, potentially, under Rule 2.2. The £200 is client money under Rule 2.1(d). If the only client money the firm holds or receives is of this type (or from the LAA under Rule 2.3(b)), and it does not operate a client account for any other purpose, it can hold the £200 outside a client account, provided the client was informed in advance where and how it would be held. However, if the firm held any other type of client money (e.g., bail money for a client), it would need a client account, and the £200 would need to be paid into it promptly.

Consequences of Non-Compliance

Failure to pay client money into a client account promptly, or incorrectly applying an exception, constitutes a breach of the Rules. Rule 6.1 requires any breaches to be corrected promptly upon discovery. If client money is wrongly paid into or held outside a client account, it must be transferred to the client account immediately upon discovery. Such breaches can lead to disciplinary action by the SRA.

Key Point Checklist

This article has covered the following key knowledge points:

• Client money is broadly defined under Rule 2.1 and must be distinguished from the firm's own business money.
• The primary rule (Rule 2.3) is that client money must be paid promptly into a client account.
• A client account must be held at a bank or building society in England and Wales and include 'client' in its title (Rule 3).
• 'Promptly' means without undue delay in the circumstances.
• There are specific, limited exceptions under Rules 2.2 and 2.3 where client money does not need to be paid into a client account.
• Failure to comply with the prompt payment rule is a breach that must be rectified immediately.
• Correct accounting entries (DR Cash, CR Client Ledger) must be made upon receiving client money into the client account.

Key Terms and Concepts

• Client Money
• Client Account
• Promptly