Client money and client accounts

Question 1

What is client money?

Answer 1

Any money that a law firm receives or holds that does not belong to the firm

Question 2

What are the four categories of client money?

Answer 2

1. money held on behalf of clients while providing them with legal services
2. money held on behalf of third parties while providing legal services to clients
3. money held by solicitors acting in certain specified roles
4. money held on account of costs and unpaid disbursements prior to the delivery of a bill

Question 3

What are regulated services?

Answer 3

The legal and other professional services that firms are regulated by the SRA to provide. It includes a solicitor acting as a trustee.

Question 4

When might money be held on behalf of third parties while providing legal services to clients?

Answer 4

In a property transaction, a solicitor may receive a deposit from the buyer that is held either as agent or stakeholder until the sale is completed or it can be money held to the sender’s order which is where a third party sends money to the solicitor to be held on their behalf until they confirm it can be released to the client or returned to them

Question 5

When may a solicitor be acting in certain specified roles?

Answer 5

• trustee for a trust
• donee of a power of attorney
• a Court of Protection deputy

Question 6

What is the difference between fees and disbursements?

Answer 6

Fees are the firm’s own charges or profit costs and disbursements are any costs or expense paid or to be paid to a third party on behalf of the client

Question 7

What are some examples of disbursements?

Answer 7

• conveyancing search fees
• counsel’s fees
• land registry fees for registration

Question 8

What must a client account be labelled with?

Answer 8

Both the name of the firm and the word ‘client’

Question 9

When might a firm not be required to have a separate client account?

Answer 9

• the only client money that the firm receives is money received in respect of their own fees and any unpaid disbursements (only includes disbursements the firm is liable to pay)
• the firm does not operate a client account for any other purpose
• the firm has told clients in advance where and how their money will be held

Question 10

What is an example of a firm that could fall into the exception of not requiring a separate client account?

Answer 10

A firm that only offered criminal litigation services

Question 11

In what way must client money be paid into a client account?

Answer 11

Promptly

Question 12

How will the receipt of client money be recorded?

Answer 12

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 columns and the credit entry will be in the client ledger while the debit entry will be in the cash sheet

Question 13

When may client money be withheld from a client account?

Answer 13

1. money that is held or received by a solicitor as a trustee or as the holder of a specific appointment. This allows the solicitor to be able to comply with other role-specific requirements
2. when the legal aid agency makes a payment for the firm’s costs. This can be paid straight into the firm’s business account even before a bill however this is still client money
3. the firm can agree alternative arrangements for holding client money with clients or third parties provided it is done in advance and is recorded in writing

Question 14

In what way should client money be available to the client?

Answer 14

On demand so immediately

Question 15

Are there any exceptions to client money being available on demand?

Answer 15

The firm can agree with the client that the money is not available on demand but this must be in writing

Question 16

Once there is no longer any proper reason for the firm to be holding the client’s money what must they do?

Answer 16

It must be returned to the client promptly

Question 17

What should the firm do if they are holding client money as the matter is not complete but the client stops giving instructions and cannot be contacted?

Answer 17

If the firm is unable to contact the client for further instructions they should return the money to the client

Question 18

What happens if the firm cannot locate the client and does not know where to return the money to?

Answer 18

After a reasonable lapse of time and reasonable efforts to contact the client the firm can seek approval from the SRA to withdraw the balance of client’s money and pay it to charity. No SRA approval is needed if the sum is less than £500

Question 19

When can client money be withdrawn from the client account?

Answer 19

1. for the purpose for which it is being held
2. following instructions from the client or third party for whom it is held
3. following authorisation from the SRA

Question 20

Who is responsible for establishing systems and processes to minimise any risks to client money in the withdrawal process?

Answer 20

Managers and Compliance officer for finance and administration (COFA)

Question 21

If client money is being withdrawn, what are the correct journal entries?

Answer 21

Debit on the client ledger and credit on the client cash sheet

Question 22

Why can law firms not hold money for clients even if their transaction is finished?

Answer 22

They are not regulated by the SRA to provide banking facilities for clients and therefore must only hold client money for a purpose that is directly related to the provision of legal services

Question 23

Can firms mix client money with business money?

Answer 23

Client money should be separate from business money - if the firm was involved in insolvency proceedings ad the client money was separate it would be kept safe and not be able to be taken

Question 24

What happens if client money is not paid into the client account properly or where money is withdrawn from the client account incorrectly?

Answer 24

Any breaches must be corrected promptly upon discovery but if it is a withdrawal or improperly withheld the breach must be remedied immediately