2. Client Money and Client Accounts

Question 1

Definition of Client Money (SRA)

Answer 1

Client money is money held or received by a firm:

1. relating to regulated services delivered by you to a client
2. on behalf of a third party in relation to regulated services delivered by you (ie. money held as agent or stakeholder)
3. as a trustee or as the holder of a specified office of appointment, such as donee of a power of attorney, Court of Protection deputy or trustee of an occupational pension scheme
4. in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same

Question 1

Money ‘on account’ received from client: client money or business money?

Answer 1

Client money, until the point at which the client is billed

Question 2

Money from client when disbursements have already been paid: client money or business money?

Answer 2

Business money

Question 3

Can firms ‘bill for future items’

Answer 3

Yes, cautiously (future bill would mean money paid into client account becomes business money)

Question 4

Statutory requirements for naming client accounts and location of the accounts

Answer 4

Must have ‘client’ in the title of the account and must be in a bank / building society in England or Wales

Question 5

If a solicitor is liable to the bank for a debt, is the bank entitled to redeem this debt from the solicitor’s client account?

Answer 5

No, the bank has no right to these funds - regardless of the account’s ‘owner’

Question 6

Requirements wrt the availability of client money - can client money be held up in accounts which have notice periods for withdrawal?

Answer 6

Client money should be ‘easily accessible’ - should not be ‘tied up’

Question 7

Rule wrt paying client money into a client’s bank account

Answer 7

Client must must PROMPTLY be paid into the client’s bank account on receipt
- Likely immediately,

Question 8

Exceptions to the general rule that client money must be paid promptly into a client account

Answer 8

1. 1. where client money falls within Rule 2.1(c) (money held as a trustee or holder of a specified office or appointment) and paying it into a client bank account would conflict with obligations relating to the specified office or appointment
2. the client money represents payments received from the Legal Aid Agency (LAA) for the firm’s costs; or
3. the firm agrees an alternative arrangement in writing with the client, or the third party, for whom the money is held.

Question 9

Can client money ever be permanently held OUTSIDE of a client account?

Answer 9

• If money falls within Rule 2.1(d) (money for fees and unpaid disbursements received prior to delivery of a bill) and firm is liable for the disbursements and does not have a client bank account for any other reason
  
  • THEN money can be held outside a client bank account but the firm must inform the client in advance and explain where the money will be held
• does not apply if firm receives any other type of client money

Question 10

Rule wrt returning client money

Answer 10

Rule 2.5 requires client money to be returned promptly to the client or the third party for whom the money is held as soon as there is no longer any proper reason to hold those funds.

Question 11

Case of aborted transaction: what should the solicitor do with the client’s money in this case?

Answer 11

If transaction falls through, the solicitor should return the money to the client unless a new transaction is actively being put in place or there are other factors (like client history) which justify the solicitor continuing to hold the funds

Question 12

Firm receives a ‘mixed receipt’ - what is this? How must the receipt of a mixed-payment be dealt with?

Answer 12

A payment for multiple different purposes (client money + business money)
- must be promptly sorted into the correct account

Question 13

If the client is holding money on account specifically for the payment of a disbursement - when should it be moved out of the client’s bank account?

Answer 13

Only when it falls DUE (as it is risky to the client for the firm to hold money before paying it, in case the firm becomes insolvent)

Question 14

Can money be transferred from the client account to pay disbursements if a bill has NOT YET been issued?

Answer 14

• If the firm has made it clear to the client that the client money may be used to reimburse the firm for payments made, it can do so without issuing a bill or notification of costs under rule 5
• Location of explanation: Client care letter, firm’s terms of engagement or in other communication with the client

Question 15

When can money be withdrawn from the client bank account?

Answer 15

1. for the purpose for which it is being held; or
2. following receipt of instructions from the client or the third party for whom the money is held; or
3. on the SRA’s prior written authorisation or in prescribed circumstances

Question 16

What if a disbursement needs to be paid and the amount held in the client’s account would be insufficient to make the payment?

Answer 16

1. payment can be made from firm’s business account (client money cannot partially reimburse and firm unless a bill is issued or the client is aware that this will happen)
2. firm can advance its own money to the client in such cases (useful when there is almost enough money) - the advance becomes client money and subject to the rules applying to client money

Question 17

What is a residual client account balance?

Answer 17

A residual client account balance is money that the firm has not returned to the client at the end of the retainer and it has become difficult to return (potentially, because client has died and executors are unknown)

Question 18

When can a firm withdraw money from a residual client account balance - what must they do with it?

Answer 18

1.If firm has taken (and documented) their reasonable steps in locating the client - and these have failed:
i. If amount is 500 or less, firm can withdraw it and pay it to registered charity
ii. If amount is >500 firm must apply to the SRA for authorisation to make the withdrawal

Question 19

Using a client’s account as a banking facility: General Rule

Answer 19

Rule 3.3 provides that the client bank account must not be used to provide banking facilities for clients or third parties. Payments into and transfers / withdrawals from the client account must relate to the provision of regulated services

Question 20

Taking client funds for matters unrelated to the legal matter: implication on the FSMA 2000

Answer 20

• if activity falls within FSMA 2000 exclusion / exemption BUT money is being taken NOT IN ACCORDANCE with the legal matter - this will ELIMINATE the exempt status

Question 21

Requirements for firms to have cash books

Answer 21

rule 8.1(c) requires firms to have a separate cash book which shows all transactions through client bank accounts. No requirements to maintain a cash book to show dealings in firm’s own money but firms will generally choose to do so.

Question 22

How often must firms obtain bank statements for their business accounts / client accounts

Answer 22

Rule 8.2 requires firms to obtain bank statements for all client bank accounts and for the firm’s own business bank accounts at least every five weeks

Question 23

Requirement to provide reconciliation statements

Answer 23

Rule 8.3 requires the firm to prepare bank reconciliation statements for the client bank accounts

Question 24

If the cash book is investigated and it differs in some regard from the figures on the client account - what should be done?

Answer 24

This should be investigated promptly and rectified as soon as practicable (SRA Accounts Rules)