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

Learning Outcomes

This article explains the fundamental requirement under the SRA Accounts Rules 2019 to pay client money promptly into a client account, clarifies what counts as client money under Rule 2.1 and how to distinguish it from business money, details practical timing expectations for bank transfers, cash, and cheques under Rule 2.3, and explains the limited exceptions in Rules 2.2 and 2.3(a)–(c), including Legal Aid payments and agreed TPMA arrangements. It presents the correct double-entry accounting for receipts and mixed payments (Rule 4.2), examines how to rectify breaches (Rule 6.1), including replacing shortfalls and correcting mispostings between business and client accounts, and discusses supporting controls such as client account naming and location (Rule 3), availability on demand (Rule 2.4), and the prohibition on using client accounts as banking facilities (Rule 3.3), as well as the consequences of non-compliance and how to remedy breaches.

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, with a focus on the following syllabus points:

• 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.
• Allocation of mixed receipts promptly to the correct account (Rule 4.2).
• Client money being available on demand (Rule 2.4).
• The prohibition on using a client account to provide banking facilities (Rule 3.3).
• The consequences of failing to pay client money into a client account promptly and remediation (Rule 6.1).

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. Prompt segregation protects client funds from risks within the firm’s business and prevents improper use of client accounts as general banking channels. This article examines what counts as client money, the core requirement to pay it into a client account promptly, the limited exceptions, and the associated accounting entries and controls.

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.

Key Term: Business Money
Money that belongs to the firm. Common examples are payments of bills already delivered and reimbursements for disbursements the firm has already paid out of its own funds.

Key Term: Costs
Costs means the firm’s fees (profit costs) and disbursements together. Profit costs include any VAT element charged on the firm’s services.

Key Term: Disbursements
Costs or expenses paid or to be paid to a third party on behalf of the client or trust (including any VAT element), excluding the firm’s office expenses such as postage or courier fees. Examples include search fees, Land Registry fees, court fees, and counsel’s fees.

Defining Client Money

Before understanding the payment obligation, it is essential to identify what constitutes ‘client money’. Rule 2.1 provides a four-limb definition.

• Money held on behalf of a client relating to regulated services (Rule 2.1(a)). This is wide and includes net sale proceeds in conveyancing, damages and settlement sums in litigation, and monies collected during estate administration.
• Money held on behalf of third parties relating to regulated services (Rule 2.1(b)). Typical examples include buyer’s deposits held as stakeholder, monies held to the sender’s order, and sums held as agent for a lender in a mortgage transaction.
• Money held by a solicitor in specified roles (Rule 2.1(c)). This captures funds administered in roles such as trustee, donee under a power of attorney, Court of Protection deputy, or trustee of an occupational pension scheme. Role-specific legal frameworks may dictate separate banking arrangements.
• Money held in respect of fees and unpaid disbursements prior to delivery of a bill (Rule 2.1(d)). This is commonly referred to as money on account of costs. Until billed, these sums are client money and must be segregated accordingly.

It is distinct from business money. For example, reimbursements for disbursements already paid by the firm are business money and do not go into the client account. By contrast, money held on account of future disbursements for which the firm is liable remains client money unless and until a bill is delivered.

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). Payments into and withdrawals from a client account must relate to the delivery of regulated services.

Key Term: Promptly
The Rules do not define ‘promptly’. In practice, firms are expected to act without undue delay. For electronic receipts, transfer into the client account should occur immediately or the same day. Cash and cheques should be banked on the day of receipt or the next working day. Avoidable delay constitutes a breach.

Paying client money promptly into a client account from the moment the firm takes receipt is a core safeguard. It protects clients against firm insolvency or misuse of funds and supports compliance with the separate rule that client money must be available on demand (Rule 2.4), barring a written agreement for an alternative arrangement.

Key Term: Mixed Receipt
A payment that includes both client money and business money (for example, a single remittance comprising settlement funds plus payment of a billed fee). Under Rule 4.2, mixed payments must be allocated promptly to the correct account.

The prompt payment requirement operates alongside other key controls:

• The client account must be one held in England and Wales and identified with the firm’s name and the word ‘client’ (Rules 3.1–3.2).
• Client money should be available on demand unless there is a written agreement for an alternative arrangement (Rule 2.4).
• Firms must not use client accounts to provide banking facilities to clients or third parties (Rule 3.3). Retaining client money for non-legal purposes or making unrelated payments from a client account risks breaching Rule 3.3.

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. For a receipt of client money:

• Debit (DR) the client cash account (reflecting increased funds in the client bank account).
• Credit (CR) the specific client ledger account (client side) (reflecting the amount held for that client).

Entries must be contemporaneous and accurate. The double entry should be on the client side for both the cash book and the client ledger. Recording the receipt on the business side would be incorrect unless the receipt is business money (for example, a payment of a billed invoice).

Firms should maintain clear narratives describing the transaction, client matter, and purpose, ensuring entries are readily traceable to supporting documentation. Regular reconciliation of client account balances against the cash book and client ledgers (at least every five weeks) is an essential control.

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

Mixed Receipts and Prompt Allocation

Where a single payment includes both client and business components, Rule 4.2 requires prompt allocation to the correct accounts. In practice:

• If a bank can split a cheque, the client portion is banked to the client account and the business portion to the business account.
• If splitting is impracticable, firms may pay the whole sum into the client account and promptly transfer the business portion to the business account, or vice versa. Allocation should be same day or next working day, with clear journal entries reflecting both the payment into one account and the transfer to the other.

Worked Example 1.3

A client pays £1,200 by bank transfer comprising £900 settlement proceeds (client money) and £300 towards a bill already delivered (business money). The firm credits the whole amount to the client account on receipt. What must the firm do next?

Answer:
Promptly transfer £300 from the client account to the business account to allocate the business portion of the mixed receipt (Rule 4.2), with entries showing a CR in the business cash account and DR in the client ledger (business side), and the corresponding DR/CR on the client side for the transfer out of the client account.

Worked Example 1.4

A firm accidentally pays a £2,000 client-on-account cheque into its business account. The cashier discovers the error the same day. What action and entries are required?

Answer:
Promptly allocate the funds to the correct account. Transfer £2,000 from the business account to the client account the same day. Journal entries: DR Client Cash Account £2,000; CR Business Cash Account £2,000. On ledgers: CR client ledger (client side) £2,000; DR client ledger (business side) £2,000 (if a temporary holding entry was made), followed by correcting entries as per the firm’s system to clear any mispostings. Record the error and its correction.

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 limited exceptions:

• Rule 2.3(a): Conflict with obligations of specified offices. If the money is held by the solicitor acting as a trustee or in another specified role and the obligations of that role require different banking arrangements (e.g., a separate deputyship account for a Court of Protection deputy), payment into the firm’s client account is not required.
• Rule 2.3(b): Payments from the Legal Aid Agency (LAA) for the firm’s costs. Payments received from the LAA that represent the firm’s costs can be paid directly into the business account.
• Rule 2.3(c): Agreed alternative arrangement. The firm can agree in writing with the client (or relevant third party) to hold money differently, provided the client gives informed consent. Examples include holding money in a Third Party Managed Account (TPMA) operated by an FCA-regulated provider.

Key Term: Third Party Managed Account (TPMA)
An account managed by a third-party, FCA-regulated provider that holds client or third-party money for a firm’s matters. Use of a TPMA requires a prior written agreement with informed consent and is outside the scope of the client account rules for money held by the TPMA.

• Rule 2.2: Narrow exception for firms that do not operate a client account. If a firm only receives client money under Rule 2.1(d) (advance payments for fees and unpaid disbursements for which the firm is liable) and does not otherwise operate a client account, the money can be held outside a client account, provided the client is informed in advance where and how the money will be held. This exception is narrow: if any other type of client money is received (e.g., sale proceeds, mortgage advances, stakeholder deposits), the firm must operate a client account and the Rule 2.2 exception will not apply.

Firms opting for a TPMA or relying on Rule 2.2 must still safeguard money, ensure transparency, and maintain appropriate records. Any agreement under Rule 2.3(c) should be tailored to the client and explain risks and interest arrangements clearly.

Worked Example 1.5

A criminal defence firm receives fees from the LAA for legal aid work and £250 from a private client on account of counsel’s fees (an unpaid professional disbursement for which the firm is liable). The firm does not receive any other client money and does not operate a client account. Can the firm hold the £250 outside a client account?

Answer:
Yes, potentially under Rule 2.2. If the only client money the firm receives falls within Rule 2.1(d) and it does not otherwise operate a client account, it may hold those funds outside a client account, provided the client was informed in advance where and how the money would be held. If the firm receives any other category of client money, it must operate a client account and pay such funds promptly into it.

Worked Example 1.6

A conveyancing firm agrees with a developer-client to use an FCA-regulated TPMA to hold reservation fees pending exchange. What is required for compliance?

Answer:
Under Rule 2.3(c), a written agreement that provides sufficient information for the client to give informed consent. The agreement should explain the TPMA provider, regulatory status, interest arrangements, fees, statements, and how funds will be released. Payments into and out of the TPMA must still relate to regulated services for the matter, and the firm should retain records and regularly obtain statements.

Worked Example 1.7

A solicitor acting as a Court of Protection deputy holds the client’s benefit payments in a separate deputyship account opened in the client’s name. Must these funds be paid into the firm’s client account?

Answer:
No. Under Rule 2.3(a), the obligations of the specified office (deputy) allow money to be held in a separate deputyship account. The funds need not be paid into the firm’s client account, but the solicitor must comply with applicable deputyship requirements and keep appropriate records.

Revision Tip

Memorise the specific exceptions to the Rule 2.3 requirement. Questions often test application of these exceptions in factual scenarios. Treat Rule 2.2 as very narrow: if any client money other than fees and unpaid disbursements (for which the firm is liable) is received, a client account must be operated and funds promptly segregated.

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, transfer it to the correct account immediately upon discovery and make appropriate ledger entries.

Breaches may also arise where the firm draws against uncleared funds and a cheque is dishonoured, resulting in a shortfall for a specific client. In such cases:

• Replace the deficiency immediately using business money, and record the rectification entries.
• Investigate root causes and implement control fixes.
• Assess whether the breach is material and must be reported to the SRA, consistent with your wider regulatory obligations.

Where a firm allows the client account to be used as a banking facility (for example, retaining proceeds for non-legal payments or enabling transactions unrelated to a legal service), it risks breaching Rule 3.3 and wider Principles. Firms must return client money promptly when there is no proper reason to continue holding it (Rule 2.5). Retention beyond what is necessary for the matter may indicate both Rule 2.5 and Rule 3.3 exposure.

Firms should support compliance through systems and controls. At minimum:

• Maintain accurate, contemporaneous, chronological records for both client and business sides of each client matter, including cash books and client ledgers.
• Reconcile client accounts against bank statements, cash books, and the sum of client ledger balances at least every five weeks. Investigate and resolve any differences promptly.
• Operate clear authorisation processes for client account withdrawals and ensure sufficient funds are held for the specific client before making any payment (Rule 5.3).

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; for bank transfers, same-day allocation; for cash/cheques, on the day or next working day.
• Mixed receipts must be allocated promptly to the correct account (Rule 4.2).
• 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, including LAA payments and agreed TPMA arrangements.
• Client money must be available on demand unless there is a written agreement providing for an alternative arrangement (Rule 2.4).
• Firms must not use client accounts to provide banking facilities (Rule 3.3).
• Failure to comply with the prompt payment rule is a breach that must be rectified immediately (Rule 6.1).
• Correct accounting entries must be made upon receiving client money into the client account (DR cash account, CR client ledger, both on the client side) and for mixed receipt allocation and error correction.

Key Terms and Concepts

• Client Money
• Business Money
• Client Account
• Promptly
• Costs
• Disbursements
• Mixed Receipt
• Third Party Managed Account (TPMA)