Introduction to solicitors' accounts - Overview of client money and client accounts

Learning Outcomes

After reading this article, you will be able to explain what constitutes client money, distinguish between client and business accounts, and understand the SRA Accounts Rules requirements for handling, recording, and safeguarding client funds. You will also be able to identify the types of client accounts, the principle of segregation, and the key compliance obligations for solicitors in England and Wales.

SQE1 Syllabus

For SQE1, you are required to understand the management of client money and client accounts under the SRA Accounts Rules. Focus your revision on:

• the definition and categories of client money
• the distinction between client money and business money
• the requirements for opening and operating client accounts
• the rules for segregation and prompt deposit of client money
• the types of client accounts (general, designated, joint)
• the compliance obligations for recording, returning, and safeguarding client money

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 client money under the SRA Accounts Rules?
   1. Money received for unpaid disbursements before a bill is delivered
   2. Money received for paid disbursements after a bill is delivered
   3. Money received for the firm's own fees after a bill is delivered
   4. Money held as a trustee for a trust

2. What is the main reason for keeping client money separate from business money?

3. True or false? A solicitor may use a client account to provide banking facilities for a client’s convenience.

4. Which type of account must include the word "client" in its name and be held at a bank or building society in England or Wales?

Introduction

When a solicitor or law firm receives or holds money for a client, strict rules apply to ensure that these funds are protected and not misused. The SRA Accounts Rules set out the requirements for handling client money and operating client accounts. Understanding these rules is essential for SQE1 and for ethical legal practice.

What is Client Money?

Client money is any money received or held by a solicitor relating to regulated legal services for a client, or on behalf of a third party in connection with those services. This includes funds for legal fees and disbursements (before a bill is delivered), settlement proceeds, property sale proceeds, and trust funds.

Key Term: client money
Money held or received by a solicitor relating to regulated services delivered to a client, or on behalf of a third party, or as a trustee, or for unpaid fees and disbursements before a bill is delivered.

Key Term: business money
Money belonging to the law firm itself, such as fees received after a bill is delivered or reimbursement for disbursements already paid by the firm.

Key Term: disbursement
A payment made by a solicitor to a third party on behalf of a client, such as court fees or search fees. Whether it is client or business money depends on whether it has been billed and paid.

The Principle of Segregation

Solicitors must keep client money entirely separate from business money. This is a fundamental requirement of the SRA Accounts Rules. Client money must be paid promptly into a client account and never mixed with the firm's own funds.

Key Term: segregation
The requirement to keep client money separate from business money at all times.

Client Accounts: Types and Requirements

A client account is a bank or building society account used exclusively for holding client money. The account must be in England or Wales and must include the word "client" in its name.

Key Term: client account
A bank or building society account, clearly designated as a client account, used solely for holding client money.

There are several types of client accounts:

• General client account: Used for holding money belonging to multiple clients.
• Separate designated client account: Opened for a specific client or matter, often for large sums or long-term holdings.
• Joint account: Opened jointly with a client or third party, usually for a specific transaction.

Key Term: general client account
The main client account used by a firm to hold money for multiple clients.

Key Term: separate designated client account
A client account opened for a single client or matter, with the client's name in the account title.

Key Term: joint account
An account held in the joint names of the solicitor and the client or a third party, not strictly a client account but still subject to some SRA requirements.

Receiving and Paying in Client Money

All client money must be paid promptly into a client account. "Promptly" generally means on the day of receipt or the next working day. The only exceptions are:

• Money received for disbursements already paid by the firm (business money)
• Money from the Legal Aid Agency for the firm's costs
• Money held as a trustee or under a specified appointment where other rules apply
• Where an alternative arrangement is agreed in writing with the client

Worked Example 1.1

A solicitor receives £5,000 from a client as a deposit for a property purchase and £500 on account of legal fees (no bill delivered yet). What should the solicitor do with these funds?

Answer: Both amounts are client money and must be paid promptly into a client account. The solicitor cannot pay either sum into the business account.

Operating and Managing Client Accounts

Client accounts must be held at a bank or building society in England or Wales, and the account name must include the word "client." The firm must keep accurate records for each client, showing all receipts and payments.

Withdrawals from a client account can only be made:

• For the purpose for which the money is held (e.g., paying a third party in a transaction)
• On the client's written instructions
• With SRA authorisation (e.g., for unclaimed balances)

The firm must never use a client account to provide banking facilities for clients or third parties. Payments into and out of the account must relate to legal services.

Exam Warning

Using a client account as a banking facility for a client’s convenience (e.g., paying personal bills or holding funds unrelated to legal work) is a serious breach of the SRA Accounts Rules and may result in disciplinary action.

Returning Client Money

Client money must be returned to the client promptly when there is no longer any proper reason to hold it. If the client cannot be traced, the firm must follow SRA procedures for dealing with unclaimed balances, which may include paying the funds to charity after reasonable attempts to return them.

Record Keeping and Compliance

Firms must keep detailed, up-to-date records of all client money received, held, and paid out. This includes:

• Separate ledgers for each client and matter
• Regular reconciliation of client account balances with bank statements (at least every five weeks)
• Retention of accounting records for at least six years

A Compliance Officer for Finance and Administration (COFA) is responsible for ensuring compliance with the SRA Accounts Rules.

Key Term: Compliance Officer for Finance and Administration (COFA)
A senior individual in a law firm responsible for ensuring compliance with the SRA Accounts Rules and reporting material breaches to the SRA.

Interest on Client Money

Firms must account to clients for a fair sum of interest on money held in a client account, unless a different arrangement is agreed in writing. The amount of interest depends on the amount held, the period, and the firm's policy.

Key Term: interest policy
The firm's written policy explaining how it calculates and pays interest on client money, which must be fair and communicated to clients.

Mixed Receipts

If a payment includes both client money and business money (e.g., a single cheque for fees and completion funds), the firm must allocate the funds promptly to the correct accounts. Usually, the whole amount is paid into the client account, and the business money is transferred to the business account as soon as possible.

Worked Example 1.2

A client sends a cheque for £1,200: £1,000 for completion of a purchase (client money) and £200 for billed fees (business money). How should the firm handle this?

Answer: The cheque should be paid into the client account. The £200 for fees must be transferred promptly to the business account, leaving only client money in the client account.

Key Point Checklist

This article has covered the following key knowledge points:

• Client money is any money held or received by a solicitor on behalf of a client, third party, or as a trustee, or for unpaid fees/disbursements before a bill is delivered.
• Client money must be kept separate from business money and paid promptly into a client account.
• Client accounts must be held at a bank or building society in England or Wales and include the word "client" in the account name.
• There are different types of client accounts: general, separate designated, and joint accounts.
• Withdrawals from client accounts are strictly limited to proper purposes and must never be used as a banking facility.
• Firms must keep accurate records for each client and reconcile client accounts regularly.
• Interest must be paid to clients on money held, according to a fair written policy.
• Mixed receipts must be allocated promptly to the correct accounts.

Key Terms and Concepts

• client money
• business money
• disbursement
• segregation
• client account
• general client account
• separate designated client account
• joint account
• Compliance Officer for Finance and Administration (COFA)
• interest policy