Learning Outcomes
This article provides an introduction to the regulatory framework governing solicitors' accounts in England and Wales. It explains the fundamental purpose of the SRA Accounts Rules and emphasises why compliance is essential for practice. For the SQE1 assessment, you need to understand the core objective of the Rules, the basic concepts of client money and business money, and the significance of adhering to these regulations. This understanding will enable you to identify key principles and apply them to SQE1-style single best answer MCQs.
A rounded understanding also includes who the Rules apply to, what systems and controls firms must maintain, the permitted and prohibited uses of the client account, and the firm’s duties to correct breaches promptly. You should be able to recognise common risk areas such as mixed receipts, improper withdrawals, use of the client account as a banking facility, failures to pay a fair sum of interest, and delays in returning residual balances.
SQE1 Syllabus
For SQE1, you are required to understand the regulatory framework for solicitors' accounts and the importance of compliance, with a focus on the following syllabus points:
- the primary objective of the SRA Accounts Rules
- the basic distinction between client money and business money
- the fundamental requirement to keep client money separate and safe
- the significance of compliance for solicitors and firms
- the potential consequences of breaching the SRA Accounts Rules.
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.
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What is the primary objective of the SRA Accounts Rules?
- Maximising firm profits.
- Standardising legal fees.
- Keeping client money safe.
- Enabling international transactions.
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Which of the following best describes 'client money' under the SRA Accounts Rules?
- Money belonging solely to the law firm.
- Money held or received by a firm relating to regulated services delivered to a client.
- Fees already earned and billed by the firm.
- Personal funds of the firm's partners.
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A solicitor mixes client funds with the firm's own business funds in the business bank account. What is the most likely immediate consequence?
- A potential tax advantage for the firm.
- A breach of the SRA Accounts Rules.
- An automatic increase in client interest payments.
- Simplified accounting procedures.
Introduction
Solicitors routinely handle money belonging to other people – their clients. This might be funds for a property purchase, settlement monies from litigation, or assets held during the administration of an estate. Holding client money involves significant responsibility and trust.
The Solicitors Regulation Authority (SRA) sets out strict rules to govern how solicitors and firms must manage these funds. These rules, known as the SRA Accounts Rules, are designed primarily to protect client money and maintain public confidence in the legal profession. Understanding the purpose of these rules and the importance of compliance is fundamental for all prospective solicitors and forms a key part of the SQE1 assessment.
The current SRA Accounts Rules (in force since November 2019) are principles-based and less prescriptive than earlier versions, but they still require robust systems and controls to keep client money safe. They work alongside the SRA Principles and Codes of Conduct, which require honesty, integrity, and acting in each client’s best interests. In practice, this means ensuring client money is held only when necessary for regulated services, kept separate from business money, recorded accurately, and returned promptly when no longer needed.
Key Term: SRA Accounts Rules
The rules set by the Solicitors Regulation Authority that govern how regulated firms and individuals must handle money belonging to clients and others. Their primary objective is to keep client money safe.
THE SOLICITORS REGULATION AUTHORITY (SRA) AND THE ACCOUNTS RULES
The SRA is the regulatory body for solicitors and law firms in England and Wales. It sets the standards for professional practice and conduct. A core part of this regulation involves ensuring that firms handle client money appropriately.
The Rules apply to authorised firms, their managers and employees (Rule 1.1). They are underpinned by the SRA Principles, including acting with honesty and integrity and in the best interests of each client. The 2019 Rules emphasise outcomes: safeguarding client money, returning it promptly when it is no longer needed, using it only for its intended purpose, and maintaining proportionate systems and controls (including timely reconciliations and records) to evidence compliance.
Who the Rules bind and what they require in practice:
- Firms must ensure client money is paid promptly into a client account, unless a specific exception applies (Rule 2.3).
- Client money must be available on demand (Rule 2.4) and kept separate from the firm’s money (Rule 4.1).
- Withdrawals from client account are permitted only in limited circumstances and with adequate controls (Rule 5).
- Firms must maintain accurate, contemporaneous accounting records, obtain statements and reconcile at least every five weeks, and keep a central record of bills (Rule 8).
- Depending on their model, firms may also operate joint accounts (Rule 9), a client’s own account (Rule 10), or use third-party managed accounts (Rule 11) with specific safeguards and notifications.
Key Term: Mixed Receipt
A single receipt that contains both client money and business money. Under Rule 4.2, it must be allocated promptly to the correct accounts.Key Term: COFA
The Compliance Officer for Finance and Administration. This individual takes reasonable steps to ensure compliance with the SRA Accounts Rules, records breaches, and reports material breaches to the SRA.
The Rules establish a framework based on principles rather than overly prescriptive detail. The central aim, stated explicitly in Rule 1.1, is the safety of client money. All other rules flow from this overarching objective. Compliance involves understanding not just the letter of the rules, but also the fundamental principles of integrity, honesty, and acting in the client's best interests, as outlined in the SRA Principles.
THE IMPORTANCE OF COMPLIANCE
Strict adherence to the SRA Accounts Rules is not merely an administrative requirement; it is a pillar of ethical legal practice and professional integrity. Compliance is essential for several reasons.
Protecting Client Money
The most fundamental reason for compliance is the safeguarding of funds entrusted to the firm. The Rules mandate strict procedures for handling client money, primarily requiring its separation from the firm's own money and ensuring it is used only for the client's specific matter.
Key Term: Client Money
Money held or received by a firm relating to regulated services delivered to a client, or money held on behalf of a third party in relation to those services, or money held as a trustee, or money held for fees and unpaid disbursements before a bill is delivered.Key Term: Fiduciary Duty
A legal obligation of one party to act in the best interest of another. Solicitors owe a fiduciary duty to their clients, particularly when handling their money, requiring utmost good faith and care.
Failure to protect client money properly can lead to significant financial loss for the client and severe repercussions for the solicitor and the firm.
Maintaining Public Trust
The legal profession relies heavily on public trust and confidence. Clients hand over substantial sums of money, often during stressful life events, based on the expectation that solicitors will act honestly and competently. The robust framework provided by the Accounts Rules helps to justify this trust. Transparent and rule-compliant handling of client funds demonstrates professionalism and integrity, reinforcing the reputation of individual solicitors, their firms, and the profession as a whole. Conversely, breaches, especially those involving misuse of client money, can cause significant reputational damage.
What compliance looks like in practice
Complying with the Rules means more than using the correct bank account. It includes:
- Ensuring prompt banking of client money (Rule 2.3) and prompt allocation of mixed receipts (Rule 4.2).
- Using the client account only for monies connected to regulated services, never as a banking facility (Rule 3.3).
- Withdrawing money only when permitted (Rule 5) and only when there are sufficient funds for that client or third party (Rules 5.2–5.3).
- Maintaining accurate records (Rule 8.1), obtaining statements and carrying out reconciliations at least every five weeks (Rules 8.2–8.3), and keeping a readily accessible central record of bills (Rule 8.4).
- Operating appropriate systems and controls, including segregation of duties, oversight by the COFA, and rapid remediation of any breaches (Rule 6.1).
Key Term: Banking Facilities
Using the firm’s client account to move or hold money for a client where there is no associated regulated legal service. This is prohibited by Rule 3.3.
Consequences of Non-Compliance
Breaching the SRA Accounts Rules can have severe consequences. These are not merely administrative errors; they represent a failure in a solicitor's fundamental duties. Potential consequences include:
- Disciplinary action by the SRA or the Solicitors Disciplinary Tribunal, including fines, conditions, suspension, or strike off.
- Orders to remedy any deficiency and replace missing client money immediately (Rule 6.1 and SRA guidance on missing client money).
- Personal accountability for managers who fail to ensure compliance systems are effective.
- Reputational damage affecting client retention and insurer confidence.
- Civil liability where clients suffer loss (e.g. breach of trust or negligence).
- Criminal sanctions in cases involving dishonesty or fraud.
Key Term: Interest Policy
A written firm policy setting out when and how a fair sum of interest will be paid to clients on money held for them, consistent with Rule 7.Key Term: Reconciliation
The periodic cross-checking of internal records against bank statements, at least every five weeks, to ensure records are accurate and any differences are investigated promptly (Rules 8.2–8.3).
Exam Warning
Breaches of the SRA Accounts Rules are taken very seriously by the SRA and can lead to significant sanctions. SQE1 questions may test your ability to identify breaches in scenarios and recognise the potential severity of the consequences. Do not underestimate the importance of compliance.
CORE PRINCIPLES SUPPORTING THE RULES
While the detailed rules cover specific procedures, several core principles form the basis of client money protection.
Separation of Money
This is perhaps the most critical principle. Rule 4.1 mandates that client money must be kept separate from money belonging to the firm.
Key Term: Business Money
Money belonging to the authorised body (the firm) itself, as distinct from client money.
This separation is typically achieved by maintaining distinct bank accounts.
Key Term: Client Account
A bank or building society account held by a firm specifically for holding client money, clearly designated with the firm's name and the word 'client'.
Mixing client money with the firm's business money (or vice versa) is a fundamental breach, as it compromises the safety and clear identification of client funds.
Worked Example 1.1
Scenario: Davies & Partners, a law firm, receives a cheque for £20,000 from a client, Mr Singh. £19,500 is to be held for the upcoming purchase of a property, and £500 is in payment of a bill already delivered to Mr Singh for initial advice. The firm's bookkeeper pays the entire £20,000 cheque into the firm's business bank account.
Question: Has Davies & Partners complied with the SRA Accounts Rules?
Answer:
No. The £19,500 for the property purchase is client money (Rule 2.1(a)). The £500 for the delivered bill is business money (Rule 2.1(d) does not apply as a bill has been delivered). Paying the £19,500 client money into the business account breaches the core principle of keeping client money separate (Rule 4.1). While Rule 4.2 allows mixed receipts to be paid into one account initially, the funds must be allocated promptly to the correct account. Paying the entire sum into the business account, especially without immediate transfer of the client money portion, is improper and risks the safety of the client's funds. The firm should have ideally split the payment or paid the full amount into the client account and promptly transferred the £500 business money to the business account.
Using the client account only for regulated services
Rule 3.3 prohibits using the client account to provide banking facilities. Client account movements must be inherently linked to delivering regulated services. Paying a client’s personal bills (e.g. school fees or rent) out of client account where there is no associated legal transaction is a classic breach. The correct course is to return the money to the client to make their own payment.
Worked Example 1.2
Scenario: A conveyancing matter has completed and the firm holds the client’s net sale proceeds. The client asks the firm to pay the next three months’ rent to their landlord from the client account while they are abroad. No ongoing legal work is connected to the rent.
Question: Can the firm make the rental payments from client account?
Answer:
No. Making payments unconnected with a legal service would be using the client account as a banking facility, which is prohibited by Rule 3.3. The firm should send the proceeds to the client (subject to any proper retentions) and the client should make their own rent payments.
Withdrawals from client account
Withdrawals are tightly controlled. Rule 5 allows withdrawals only when money is needed for the purpose for which it is held, on proper instructions, on SRA authorisation, or to pay the firm’s costs where the firm is entitled to them (typically after delivering a bill or written notification of costs). The firm must also supervise withdrawals and ensure sufficient funds exist for that client or third party (Rules 5.2–5.3).
Worked Example 1.3
Scenario: A firm holds £2,000 for a client on account of costs in litigation. Before sending a bill, the partner directs accounts to transfer £1,500 from client to business account “as interim fees.”
Question: Is the transfer permitted?
Answer:
No. The firm is not entitled to take its costs from client account until it has delivered a bill or otherwise become entitled to those costs (Rule 4.3 read with Rule 5 and standard billing practice). Transferring costs before entitlement is a breach.
Mixed receipts
Mixed receipts are common (e.g. part bill payment, part funds on account). Rule 4.2 requires prompt allocation to the correct accounts. In practice, many firms pay mixed receipts into the client account and promptly transfer the business element to the business account, minimising the risk of client account shortage.
Key Term: Mixed Receipt
A receipt combining client money and business money that must be promptly split between the client and business accounts (Rule 4.2).
Worked Example 1.4
Scenario: The firm receives a £1,200 bank transfer comprising £800 for an issued bill and £400 on account of future disbursements. The cashier leaves the whole sum in the client account for three weeks without allocation.
Question: Has the firm complied with Rule 4.2?
Answer:
No. The business element (£800) should be promptly transferred to the business account. Leaving it in client account for an extended period fails to allocate promptly under Rule 4.2 and risks misstatements and reconciliation anomalies.
Dishonoured cheques and immediate remediation
If the firm pays money out of client account in expectation of a client cheque clearing and the cheque later bounces, the client account may become overdrawn for that client. The firm must promptly remedy the breach by transferring business money to restore the client account (Rule 6.1) and investigate the control failure.
Worked Example 1.5
Scenario: The firm receives a £3,000 client cheque and, before it clears, pays a £2,500 disbursement from client account. The cheque is later dishonoured, leaving a shortfall.
Question: What must the firm do?
Answer:
Immediately transfer business money to the client account to eliminate the shortfall (Rule 6.1), correct the client ledger, and review procedures to prevent recurrence. The firm should not keep operating with a deficiency on client account.
Record Keeping
Accurate and up-to-date records are essential. Rule 8 requires firms to maintain proper accounting records showing dealings with client money for each client and matter. This ensures transparency and allows firms (and the SRA, if necessary) to track the movement and status of client funds at all times. (Detailed record-keeping requirements are covered in subsequent topics).
In particular, firms must:
- Keep separate ledgers for each client and matter, with running balances (Rule 8.1).
- Keep a cash book for client account transactions (Rule 8.1(c)).
- Obtain bank statements and reconcile at least every five weeks (Rules 8.2–8.3).
- Keep a central, readily accessible record of all bills or written notifications of costs (Rule 8.4).
- Retain records for at least six years.
Interest on client money
Rule 7 requires firms to account to clients (or third parties) for a fair sum of interest on client money held, unless a different arrangement is agreed in writing with informed consent. Interest on the general client account belongs to the firm, but a fair sum must be paid to the client (treated as a business expense). For separate designated deposit client accounts, the client will usually receive all bank interest.
Key Term: Interest Policy
A written policy explaining when and how the firm pays a fair sum in lieu of interest, often with a de minimis threshold, communicated at the outset (Rules 7.1–7.2).
Worked Example 1.6
Scenario: A firm holds £150,000 for five months pending a probate distribution. It has no written interest policy and pays no interest.
Question: Has the firm complied with Rule 7?
Answer:
No. The firm must have a policy to achieve a fair outcome and should pay a fair sum in lieu of interest (Rule 7.1). In the absence of a different written agreement with informed consent (Rule 7.2), paying nothing is unlikely to be fair for a significant sum held for months.
Returning Client Money
Rule 2.5 states that client money must be returned promptly to the client (or third party for whom it is held) as soon as there is no longer any proper reason to hold those funds. Firms cannot hold client money indefinitely or use the client account simply as a holding facility once the legal matter it relates to is concluded.
Residual balances are a recurring risk. Firms should be proactive in locating clients/beneficiaries and returning funds swiftly. Where clients cannot be traced, firms must follow SRA guidance on residual client balances; any proposal to pay funds to charity should meet the SRA’s conditions.
Worked Example 1.7
Scenario: A conveyancing file completed eight months ago. A residual balance of £37.50 remains on client account due to roundings and disbursement adjustments. No action has been taken.
Question: Is the firm compliant?
Answer:
No. There is no proper reason to hold the balance. The firm must attempt to return the funds to the client promptly (Rule 2.5) and should have processes to identify and clear residual balances.
Accounts beyond the general client account
Some situations require different account structures or obligations.
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Joint accounts (Rule 9): where the firm holds money jointly with a client or third party (e.g. as joint executor). Part 2 Rules on client accounts largely do not apply, but the firm must obtain statements at least every five weeks and keep a central record of bills (Rules 8.2 and 8.4 applied via Rule 9.1). Additional safeguards (e.g. joint signatures) may be prudent.
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Client’s own account (Rule 10): when acting as a signatory (e.g. as a deputy or attorney), the firm must obtain statements and reconcile at least every five weeks, and maintain a central record of bills (Rules 8.2–8.4 applied via Rule 10). Money should be managed in the client’s own account unless an exception applies.
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Third-party managed accounts (TPMAs) (Rule 11): some firms choose to use a TPMA provider instead of operating a client account. This can be appropriate if it is in the client’s best interests and safeguards are in place. Firms must notify the SRA of TPMA usage and keep appropriate oversight and records.
Key Term: Joint Account
An account held in the joint names of the firm and a client or third party. Limited Parts of Rule 8 apply (statements and records), and additional safeguards may be needed (Rule 9.1).Key Term: Client’s Own Account
A bank account in the client’s name operated by the firm as signatory (e.g. deputy or attorney). Limited Parts of Rule 8 apply (statements, reconciliation, central record of bills) under Rule 10.Key Term: Third-Party Managed Account (TPMA)
An account managed by an FCA-regulated provider holding monies for clients on behalf of the firm. Money is not “client money” under the SRA Accounts Rules, but firms must ensure appropriateness, inform clients, and notify the SRA (Rule 11).
Worked Example 1.8
Scenario: A solicitor appointed as Court of Protection deputy receives the protected person’s pension and manages all outgoings. He pays these through the firm’s general client account for convenience.
Question: Is this appropriate?
Answer:
No. In deputyship, the proper course is to operate the client’s own account and comply with Rule 10 (statements, reconciliation, and records). Using the firm’s general client account risks breaching the prohibition on providing banking facilities and bypasses the enhanced protections tied to operating the client’s own account.
Key Point Checklist
This article has covered the following key knowledge points:
- The primary purpose of the SRA Accounts Rules is to keep client money safe.
- Compliance with the Rules is essential for protecting clients, maintaining public trust, and avoiding severe sanctions.
- Client money must be kept separate from the firm's own business money, typically in a designated client account.
- Solicitors have a fiduciary duty when handling client money.
- Breaches of the Rules can lead to disciplinary action, fines, reputational damage, and potentially civil or criminal liability.
- Core principles include separation of funds, accurate record-keeping, and prompt return of client money.
- The client account must not be used as a banking facility (Rule 3.3).
- Mixed receipts must be allocated promptly to the correct account (Rule 4.2).
- The firm may take costs from client account only when entitled, typically after delivering a bill (Rule 4.3 and Rule 5).
- Firms must reconcile client account records at least every five weeks and keep a central record of bills (Rules 8.2–8.4).
- Firms must pay a fair sum in lieu of interest and maintain a written interest policy (Rule 7).
- Breaches must be remedied promptly, including replacing any client account shortfall with business money (Rule 6.1).
Key Terms and Concepts
- SRA Accounts Rules
- Client Money
- Fiduciary Duty
- Business Money
- Client Account
- Mixed Receipt
- Banking Facilities
- COFA
- Interest Policy
- Reconciliation
- Joint Account
- Client’s Own Account
- Third-Party Managed Account (TPMA)