1. Transactions involving client money and money belonging to the authorised body

Question 1

What is the impact for the client if Client Money is not kept safe?

Answer 1

The money clients entrust to their solicitors is there to fund transactions such as conveyancing, investments or business deals. If the money is not there when it is needed, the transaction could fail.

This can cause great inconvenience and personal distress for the client.

Question 2

What do th SRA recommend if client money is lost or taken?

Answer 2

Then you/the firm must report this breach to them promptly.

This is the case even where you/the firm have already replaced the money.

Question 3

What MUST firms do in order to protect client money? Firms must:

Answer 3

• vet, train and supervise staff
• make sure everyone knows their responsibilities to keep client money safe
• have a business succession plan and contingency plans for accounting staff
• have systems for good account management and audit
• have strong IT systems with good backups
• reconcile accounts that are signed off by the compliance officer for finance and administration at least every five weeks
• not allow the client account to be used as a banking facility
• engage with SRA about any concerns

Question 4

Are just the compliance officers responsible for keeping client money safe?

Answer 4

NO

Protecting client money needs collective effort. All solicitors are responsible for keeping client money safe – not just the compliance officers.

Question 5

What are the SRA Account Rules?

Answer 5

Rules that set out the requirements for when firms (including sole practices) authorised by us receive or deal with money belonging to clients, including trust money or money held on behalf of third parties.

The rules apply to all firms we regulate, including all those who manage or work within such firms.

Question 6

Who do the SRA Accounts Rules Apply to?

Answer 6

Apply to authorised bodies, their managers and employees.

1.1 These rules apply to authorised bodies, their managers and employees and references to “you” in these rules should be read accordingly.

1.2 The authorised body’s managers are jointly and severally responsible for compliance by the authorised body, its managers and employees with these rules.

Question 7

What are authorised bodies?

Answer 7

Bodies authorised by the SRA to practise as either bodies licensed by the SRA or bodies recognised by the SRA.

Question 8

What are managers?

Answer 8

The sole principal in a recognised sole practice; members of a LLP; directors of a company; partners in a partnership; or in relation to any other body, a member of its governing body.

Question 9

Who is responsible for compliance?

Answer 9

The authorised body’s managers are jointly and severally responsible with compliance by the authorised body, its managers and its employees.

Question 10

How many SRA account rules are there?

Answer 10

13 Across 4 sections.

Question 11

What are the four sections?

Answer 11

1. Application
2. Client money and client accounts.
3. Dealings with other money belonging to clients or third parties.
4. Accountants reports and storafe and retention of accounting records.

Question 12

What does section 1 contain?

Answer 12

The application section.

Apply to authorised bodies, their managers and employees.

1.1 These rules apply to authorised bodies, their managers and employees and references to “you” in these rules should be read accordingly.

1.2 The authorised body’s managers are jointly and severally responsible for compliance by the authorised body, its managers and employees with these rules.

Question 13

What does section 2 apply to?

Answer 13

Client money and client accounts.

The largest section, contrains rules 2-8.

Covers what client money is, and obligations in respect of it.

Question 14

What does section 3 apply to?

Answer 14

Dealings with other money belonging to clients or third parties.

Rules 9-11.

Deals with the operation of joint accounts, client’s own account and 3P managed accounts.

Question 15

What does section 4 contain?

Answer 15

Accountants reports and storae and retention or accounting records.

Rules 12 and 13.

Deals with obligations regarding obtaining and delivering accountants reports and the storage and retetention of accounting records.

Question 16

Under rule 12, what must you do if you have held or received client money, or operatinf a joint account as a signatory during an accounting period?

Answer 16

You must:

• obtain an accountant’s report for the accounting period with SIX months of the end of the period.
• deliver it to the SRA within SIX months of the end of the accounting period, IF the accountants report shows a failure to comply with these rules, such that client money is at risk.

Question 17

If the authorised body has NOT held client money for the account period, will it be required to obtain an accountant’s report?

Answer 17

NO (rule 12.1(a).)

ONLY qualified reports should be delivered to the SRA.

Question 18

What is a qualified accountants report?

Answer 18

It shows a failure to comply with the SRA Accounts Rules so that th client’s money has been/is/likely to be at risk.

Question 19

What reports to the SRA expect?

Answer 19

They only expect reports to be qualified where there has been a significant breach of the Accounts Rules, such that money belonging to clients or third partiesis, has been or may be placed at risk.

Question 20

Do all breaches have to be reports to the SRA?

Answer 20

NO.

The SRA ‘recognise that minor breaches of the Accounts Rules do occur in many firms and we are not expecting all identified breaches to be notified to us in the form of a qualified report.’

Question 21

What factors would lead to a report being qualified?

Answer 21

• A significant and/or unreplaced shortfall on client account (unless caused by bank error and rectified promptly);
• Actual or suspected fraud or dishonesty by the managers or employees of the firm (that may impact upon the safety of money belonging to clients or third parties)’;
• Accounting records not available (or bank accounts/ledgers failing to include reference to a client);
• Client account bank reconciliations not being carried out’; and
• The client account …improperly used as a banking facility’.

Question 22

When is it NOT required to obtain and accountants report?

Answer 22

• all of the client money held or received during an accounting period is money received from the Legal Aid Agency; or
• in the accounting period, the statement or passbook balance of client money you have held or received does not exceed:

i. an average of £10,000; and

ii. a maximum of £250,000,

Question 23

What is a statement or passbook balance?

Answer 23

Is the total balance of:

• all client accounts held or operated by you; and
• any joint accounts and clients’ own accounts operated by you,

Question 24

What are the 2 exceptions to the obtaining an accountants report even if the authorised body is required?

Answer 24

• Where all of an authorised body’s client money held or received during an accounting period is money from the Legal Aid Agency, it will not be required to obtain an accountant’s report if under Rule 12.1.
• If during the accounting period, the average balance on its client account(s) does not exceed £10,000 AND the maximum balance does not exceed £250,000, the authorised body is not required to obtain an accountant’s report.

Question 25

Do the exceptions apply indefinitely?

Answer 25

No.
These exemptions only apply to that accounting period (usually a year). It may be that the following accounting period, the authorised body does not fall within the exemptions and so needs to obtain an accountant’s report.

Question 26

Who can be an accountant for the authorised report?

Answer 26

The accountant needs to be both a member of a chartered accountancy body AND work for or be a registered auditor.

Question 27

What is the form of the report?

Answer 27

The prescribed form by the SRA.

Question 28

When can the SRA disqualify an accountant?

Answer 28

• The accountant has been found guilty by their professional body of professional misconduct or equivalent; or
• The SRA is satisfied that the accountant has failed to exercise due care and skill in the preparation of a report under these rules.

Question 29

What must be provided to the accountant in order to prepare the report?

Answer 29

• Details of all accounts; and
• All other information and documentation that the accountant requires.

Question 30

How long must the accounting records be stored?

Answer 30

For at least SIX YEARS.

Question 31

Is a joint account a client account?

Answer 31

No.

But the funds held inside a joint account are still client money.

Question 32

Is client money more at risk in a joint account?

Answer 32

Yes, as those named on the joint account will have equal access to it, the risks to a client’s money could be higher than if the money was kept in your firm’s client account with processes and safeguards to authorise withdrawals.

Question 33

What SRA Account Rules apply to joint accounts?

Answer 33

Rule 1 - who the Accounts Rules apply to

Rule 8.2 –obtain, at least every FIVE WEEKS, statements from banks, building societies etc for all client accounts and business accounts

Rule 8.4 – to keep readily accessible a central record of all bills or other written notifications of costs given by you

Question 34

Does the rule on obtaining an accountants report apply to joint accounts?

Answer 34

Yes.

The bank statements and bills for the joint account are the accounting records for it so need to be kept securely for at least six years under Rule 13.1.

Question 35

What is a joint account in the context of Rule 9.1 SRA Account Rules?

Answer 35

A joint account in Rule 9.1 is an account which is in the names of the solicitor/authorised body and the client or a third party.

Question 36

When can arrangements to ues a third party managed account in respected of regulated services be used?

Answer 36

Only if:
- use of the account does not result in you receiving or holding the client’s money; and

• you take reasonable steps to ensure, before accepting instructions, that the client is informed of and understands:

The terms of the contractual arrangements relating to the use of the TPMA, and in particular how any fees for use of the TPMA will be paid and who will bear them; and

The client’s right to terminate the agreement and dispute payment requests made by you

Question 37

What does TPMA mean?

Answer 37

Third party managed account?

Question 38

Must statements be obtained from the provider of the TPMA?

Answer 38

Yes - these must accurately reflect all transactions on the account.

Question 39

Does money in a TPMA fall under the defintion of client money?

Answer 39

No, as it is not held or received by the authorised body.

Question 40

What rules apply to the authorised body using a TPMA?

Answer 40

• The authorised body has to ensure use of the TPMA does not result in them receiving or holding the client’s money.
• The authorised body must take reasonable steps to ensure the client is informed of and understands:

their rights and obligations and what use of the TPMA means in their case, in particular any charges or fees they are liable to pay (Rule 11.1(b)(i)); and

their right to terminate the agreement and dispute payment requests you make (Rule 11.1(b)(ii).

• The authorised body must obtain regular statements and ensure these reflect transactions on the account correctly (Rule 11.2).

Question 41

What are the requirements for a TPMA?

Answer 41

Must be:

• regulated by the FCA (Financial Conduct Authority);
• an authorised payment institution/ EEA authorised payment institution/ small payment institution which has adopted voluntary safeguarding arrangements to the same level as an authorised payment institution;
• an account at a bank/ building society;
• operated as an escrow payment service (the third party receives and disburses money on your and your client’s behalf); and
• the monies in the TPMA must be owned beneficially by the third party.

Question 42

What is the SRAs overarching objective?

Answer 42

To keep client money safe

Question 43

How is the overraching objective of keeping client money safe achieved?

Answer 43

Authroised bodies, their managers and employees must keep client money serparate from money belonging to the authroised body.

To do so, when you receive or hold money you must be able to work out whether it is money which belongs to the clients - client money - or money which belongs to the authorised body.

Question 44

How does Rule 2.1 define client money?

Answer 44

‘Client money’ is money held or received by you (authorised bodies, their managers and employees ie those to whom the SRA Accounts Rules apply):

(a) relating to regulated services delivered by you to a client;

(b) on behalf of a third party in relation to regulated services delivered by you (such as money held as agent, stakeholder or held to the sender’s order);

(c) as a trustee or as the holder of a specified office or appointment, such as donee of a power of attorney, Court of Protection deputy or trustee of an occupational pension scheme;

(d) in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same.

Question 45

What are some examples of client money?

Answer 45

• Money received from the client ‘on account of costs’.

Once a solicitor has been instructed in connection with a matter, they will usually ask the client to provide money to cover the likely costs of the matter. For example, if a solicitor has been instructed in connection with a property purchase, it is common practice for the solicitor to ask the client for money to cover the search fees that will be incurred eg Land Registry fees. No such fees will yet have been paid for by the solicitor so the money, when received, is client money.

• Money received in respect of unpaid costs or expenses.

This would include, for example, Stamp Duty Land Tax, Land Registry fees and court fees which are expected to be paid in connection with a transaction, but which have not yet been paid (because, for example completion has not happened so the Stamp Duty Land Tax payment is not due).