Client Money and Client Accounts

Question 1

Explain rule 4.1 of the SRA solicitors accounts rules.

Answer 1

Client money must be kept separate from money belonging to the firm.

Question 2

How does rule 2.1 define client money?

Answer 2

Its states 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 (eg money held as an agent or stakeholder, or held to the sender’s order);

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

4) In respect of fees, any unpaid disbursements if held or received prior to delivery of a bill for the same

Question 3

How is fees defined for the purposes of the SRA accounts rules?

Answer 3

Defined as ‘your own charges or profit costs (including any VAT element)’.

Question 4

How are disbursements defined for the purposes of the SRA accounts rules?

Answer 4

Defined as ‘costs or expenses paid or to be paid to a third party on behalf of the client or trust (including any vat element)’

Question 5

Explain how money is treated where a firm has paid a disbursement and the client later send the firm the money for that disbursement.

Answer 5

The money received from the client will be business money (ie will be paid into the business account).

Question 6

Is money received for fees and disbursements deemed client money under the SRA accounts rules?

Answer 6

Yes. Unless the disbursement was paid in advance by the firm and is later recouped from the client.

Question 7

What is a client account and are there any requirements imposed by the SRA rules?

Answer 7

• A client account is an account whereby all client money is kept.
• Rule 3 requires this account to be at a bank or building society in England and Wales.
• The account name must include the word client in it to distinguish between the client account and the firm’s business accounts.
• Rule 2.4 requires firms to ensure client money is available on demand unless an alternative arrangement has been agreed with the client or the third party for whom the money is held. As such, firms should not put client money in accounts which require extended notice periods for withdrawals.

Question 8

What is the significance of including the word client in the account name of the client account?

Answer 8

• It provides the account with protection against recourse from the bank.
• In effect, a bank has no recourse against the money in a client account to enforce liabilities against a solicitor or a firm, given this will clearly be deemed and labelled as client money to be distinguished from the firm’s business accounts.

Question 9

Explain the general rule for paying client money into the client bank account (rule 2.3).

Answer 9

General rule is that client money must be paid into the client bank account ‘promptly.

Question 10

List the exceptions to the general rule that client money must be paid into the client bank account promptly (rule 2.3).

Answer 10

(a) 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;

(b) the client money represents payments received from the Legal Aid Agency (LAA) for the firm’s costs; or

(c) the firm agrees an alternative arrangement in writing with the client, or the third party, for whom the money is held.

Question 11

Can payments from the Legal Aid Agency be paid into a firm’s business account?

Answer 11

Yes.

Question 12

Where an LAA payment is paid into a firm’s business account, is there a requirement on how long the payment can be held before being paid into the client account?

Answer 12

• No. However this does not mean firms can hold payments from the LAA in their business bank account indefinitely.
• For example, if a firm does not pay an experts fee (due to retaining such money in its account to avoid an increasing overdraft) and this therefore delays a client matter, this would be deemed to breach the accounts rules to make payments promptly.

Question 13

Explain the limited exception to the general rule (2.2) that client money must be held in a client bank account (in relation to disbursements).

Answer 13

Firm’s can hold client money outside a client bank account where the following requirements are satisfied:

1) Client money received or held is for fees and/or unpaid disbursements, and is received prior to the bill; and
2) The firm does not have a client t bank account for any other season; and
3) The firm informs the client in advance where and how the money is to be held.

Question 14

Explain the proceeder with regards to mixed receipts.

Answer 14

In accordance with rule 4.2 the firm must allocate the correct funds to the correct account promptly.

Question 14

What does rule 2.5 of the SRA accounts rules provide?

Answer 14

Client money must be returned promptly to the client or third party for whom the money is held as soon as there is no longer and proper reason to hold those funds.

Question 15

What does rule 4.1 of the SRA accounts rules provide?

Answer 15

Requires client money to be kept separate from the firm’s own money.

Question 16

Define mixed receipts for the purposes of the SRA accounts rules.

Answer 16

• A mixed receipt is a mixed payment from a client which contains money for two different purposes (ie some money which can be paid into the business account and some which can be paid into the client account).
• A common example would be client money for a particular purpose, in addition to money to pay the firm’s bill.

Question 17

Explain rule 4.3 of the SRA accounts rules.

Answer 17

Where firm holds client money and some or all of that money is to be used to pay the firm’s costs:

1) A bill of costs, or other written notification must be sent to the client or the paying party;
2) This must be done prior to the transfer of any client money out of a client account to make the payment; and
3) Such payments must be for specific sum identified in bill of costs/ written notice and covered by the amount held for the particular client/ third party.

This money should be transferred promptly once the ab one are satisfied.

Question 18

Is there an exception to rule 4.3 of the SRA accounts rules (in relation to transferring client money held to pay costs out font client account)?

Answer 18

Yes.

Where the bill sent to the client includes an anticipated disbursement not incurred, you will not be considered to be in breach off rule 4.3 by leaving the money associated with those billed anticipated disbursements in the client bank accountn until such time as they are paid.

Question 19

Expalin rule 5 of the SRA accounts rules.

Answer 19

• It is permitted for money to be withdrawn from the client bank account for the purpose for which it is being held.
• If firm makes it clear to client that the client money in question may be used to reimburse the firm for payments made, this can be done without issuing a bill or written notification to the client.
• This may be explained in the client care letter, TOEs or other communications.
• Note this DOES NOT apply where disbursements have not yet been incurred/ have not yet been paid by the firm.

Question 20

List the circumstances where client money can be withdrawn (set out in rule 5.1 of the SRA accounts rules).

Answer 20

1) For the purposes for which it is being held; or
2) Following instructions from client or third party for whom money is held; or
3) On SRA’s prior written authorisation or in prescribed circumstances.

Question 21

Explain real 5.2 of the SRA accounts rules.

Answer 21

All withdrawals from the client account must be apporpaitely authorised and supervised.

Question 22

Explain rule 5.3 of the SRA accounts rules.

Answer 22

Withdrawals can only be made from a client account if there is sufficient funds in the account to do so (ie client account cannot be put into debt as this would effectively be using money marked for another client for the client in question, breaching professional conduct and accounts rules).

Question 23

Expel rule 6 of the SRA accounts rules.

Answer 23

Breaches of the rules and errors must be correctly rectified promptly discovery of the error, and the money improperly withdrawn must be immediately replaced.

Question 24

What crude of action can a firm take if the disbursement exceeds the amount in the client account>

Answer 24

Either:

1) Make the payment out of its business count and get the funds reimbursed by way of issuing a bill to the client (ie including the disbursement in the bill); or

2) Transfer some money into the client account (ie advance the shortfall to the client). This money would then become client money and is useful where there is almost enough to make the payment.

Question 25

Explain rule 3.3 of the SRA accounts rules.

Answer 25

• Client bank accounts must not be used to pride banking facilities for clients or third parties.
• Payments into, and transfers or withdrawals from, a client account must therefore relate to the provision of regulated services.

Question 25

What is the SRA mandatory statement in regards to the situations where no authorisation is required from the SRA to move money out of a client bank account?

Answer 25

• The prescribed circumstances are where the withdrawal of residual client balances of less than £500 on any one client matter provided the money is then paid to charity.
• It is also required the firm first makes reasonable steps to return the money to the client and to keep proper records of what has been done.
• For residual balances of more than £500 the firm must seek authorisation from the SRA to make the withdrawal.

Question 26

What records does the firm need to keep in relation to each specific client’s money transferred into the firm’s client account?

Answer 26

1) All receipts ad payments of client money;
2) All payments made on behalf of the client from the firm’s own money; and
3) The bill issued to the client.

Question 27

What does rule 8.1(a) require?

Answer 27

• That a firm maintains a client ledger account for each client, with the client being identified by their name and an appropriator description of the matter.
• Client ledger account must show all receipts and payments of client money.
• It must also record payments made by firm from its pwn money on behalf of the client, the issue if bills to the client and any money received to pay these bills.

Question 28

What does rule 8.1(b) require?

Answer 28

Requires firm’s to maintain a list of balances shown y the client ledger accounts of all liabilities to clients and third parties, with a running total of those balances shown.

Question 29

What does rule 8.1(c) require?

Answer 29

Requires firms to have a separate cash book showing all transactions through client bank accounts.

Question 30

What do rules 8.2 and 8.3 require?

Answer 30

1) 8.2 - Firm’s must obtain bank statements for all client bank accounts and for the firms own business bank accounts at least every 5 weeks.

2) 8.3 - firm must prepare bank reconciliation statements for the client bank accounts, requiring careful checking of the figures included. As such the cash book must be kept up to date reflecting any unexpected items appearing in the bank statement. Figures on the bank statement must then be adjusted to reflect the fact that (for example) when a firm makes a payment using client money this will appear in the firm’s accounting records immediately, but not on the bank statement until the cheque is presented for payment.

Question 31

What does rule 8.4 require?

Answer 31

• Requires a central record of bills and other written notifications of costs to be kept in a readily accessible form.
• This applies equally to firm’s which do not operate a client account.