1. Client Money and Client Accounts Flashcards
What is Client Money?
Client money is any money that belongs to a client or third party rather than the firm.
What are the 4 types of client money?
- Money Held on behalf of Clients while providing them legal services
- Money Held on behalf of third parties while providing them legal services
- Money held by solicitors acting in certain specified roles
- Money held on account of costs and unpaid disbursements prior to delivery of the bill
What is money held on behalf of a client or third party? Give examples
This is money held on behalf of a client or third party during a regulated service ( legal service)
For clients:
For example the net proceeds of sale in a residential or commercial property transaction all monies collected in administrator in a deceased estate.
For third parties:
For example in a property sale transaction, a solicitor may receive that deposit from the buyer that is held until the sale is completed.
If a client sends a firm money on account of the firms fees and diumbursments, is it the clients money or business money?
Such money is treated as client money until a bill is delivered.
What are the 2 requirements of a client account?
- The bank account must be in England or Wales.
- The name of the client account must be labeled with both the name of the firm and the word client.
This clearly distinguishes the firm's money from business money and keeps it safe from insolvency practitioners.
What are the two types of client accounts and when are they used?
- A General Client Account
The main client account, will hold client money from various clients and third parties.
As they will go into one account, it is important that individual client ledgers are maintained.
- A Sepeare client account relating to an individual client matter
This may be appropriate where legal matter requires that a firm holds a significant sum of money for a protracted period.
What are the 2 exceptions in which a firm will not need a separate client account?
- Third party business manages their client money
- Only receiving payment for own fees, they do not have a client account for any other purpose, and the client know where their money is going.
This is rare, but will apply to firms such as a criminal practice firm whose only payment is of fees.
When must client money be paid into the client account?
It must be paid PROMPTLY
For transfers - Should go directly to the client account, or transferred very shortly after.
For cash / cheque - Should be paid into client account on same, or next, working day.
What accounting requirements are there for receipt of client money (what are the 2 documents used) ?
Which column will they be in?
Where will the credit entry and debit entry be?
VERY IMPORTANT
- For each receipt of client money, a double entry must be made using the firm’s cash sheet and the individual client Ledger.
- Both entries will be in the client account column
- the credit entry will be in the client Ledger and the debit entry will be in the cash sheet.
On a client ledger, what colum represents money in?
Very important
Credit entry
On a cash sheet, what colum repersents money in?
very important
Debit entry
What are the 3 exceptions to paying client money into the client account promptly?
- To comply with other requirments
Where the money is held or received by solicitor as a trustee or as the holder of a specified office or appointment, there is an exception to allow the solicitor to comply with other role Pacific requirements that may conflict with this principle. For example, a court protection appointed deputy will usually hold money belonging to an in capitated person in a separate deputyship account.
- Legal Aid
Where the payment for the clients legal fees and disinvestments have come from the legal aid agency, the money can go directly to the business account before a bill has been produced.
- Agreement in writing in advance for third party managed accounts.
Where the firm has agreed with the client or third party in advance and that agreement is reported in writing, the firm can use third party managed accounts.
Why must client funds be in an account that can be immediately withdrawn from?
What is the exception?
As the clients’ money is not the firms, they can request it back at any time and it must BE AVALIABLE ON DEMAND (IE IMEDIETLAY). Thus, it must be in an account that can be withdrawer from instantly.
The only exception is if the firm and client have agreed in advanced in writing.
When must client’s money be returned?
A firm cannot hold client money indefinitely, thus as soon as there is no longer any proper reason for holding it, it must be REUTRNED PROMPTLY.
This means once a legal matter has been completed, the client money must be returned promptly.
What should law firms do if they are holding clients money, the legal matter is incomplete, but they cannot contact the client to get further instructions and are ‘stuck’ with the money?
Why?
The money should be sent back to the clients account.
If they do not have the clients details, after a reasonable time and efforts to contact have occurred, they can apply to the sra to give the money to charity. (no approval needed for less than £500).
If not, they can indirectly be providing banking services to clients.
What are the only 3 circumstances a withdrawal from a client account can be made?
- Following authorization from the SRA
- Instructions from the client or third party whose money it is.
- For the purposes for which it is being held. (For example, if the money has been paid for fees and dismemberments, the firm can withdraw money for the cost of search fees.)
However, the solicitor must ensure the client money is only withdrawn if sufficient funds are held on behalf of that client. Otherwise, as it’s a joint account, other clients money would be used which is not allowed.
With regards to withdrawal of client monies from the client account, who must be appointed in a firm, and what is their role?
All firms must have a Compliance Officer for Finance and Adminstration
They must ensure only people with sufficient seniority and understanding of the rules are allowed to aythorise withdrawals from a client account.
They must put in place policies to minimise any risks to client money, for example a policy requiring a training solicitor always seeks authorisation from a partner for any withdrawal from a client account.
What is the only reason firms may accept client money regarding being able to provide banking facilities?
Law firms are not regulated to provide baking services.
Thus, client funds must be held for a purpose that is directly related to the provision of legal services.
(If not, they could also be aiding money laundering)
When receiving business money into the business account, what are the accounting requirement documents?
Which will have the credit entry and debit entry
- Client Ledger and Cash Sheet
- Client ledger is the credit entry, Cash sheet is the debit entry
When withdrawing business money into the business account, what are the accounting requirement documents?
Which will have the credit entry and debit entry
- Client Ledger and Cash Sheet
- The client ledger is the debit entry, Cash sheet is the credit entry
What is the genral rule about correcting breaches of the Solicitor Accounts Rules?
Any breaches of the rules must be CORRECTED PROMPLTY UPON DISCOVERY.
However, if the breach relates to improperly withheld or withdrawn client money, it must be immediately rectified.
If the client sends a cheque for legal fees, but the bill has not yet been delivered to the client, does the money go to the business account or client account?
Until the bill has been delivered, it is client money.
Thus it must go into the clients account, and transferred to business account once paid.
What happens if a solicito makes payment from the client account, but the client does not have sufficient funds in the client account?
The solicitor would have technically used another clients money, and so must transfer the shortfall from the business account to the clients account
What is the general rule for journey entires?
There will always be 2 documents.
On the client ledger, money in will always be a credit.
Money out will always be a debit.
On the second document, it will be the opposite.
The second document will be a
- Cash account (if any sort of money)
- Profit Costs (If law firm has sent a bill and not yet been paid - credit on client ledger, debit on profit costs)
- VAT - For any tax?
