Client money and client accounts

Question 1

What is the definition of a ‘client’ according to the glossary?

Answer 1

The person for whom you act.

Question 2

What is the definition of ‘client money’ according to Rule 2.1?

Answer 2

Money held or received by a firm: (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 an 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 a 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 3

What is ‘business money?’

Answer 3

Money received for disbursements which have already been paid.

Question 4

Money received for all fees and disbursements paid to the firm is considered client money unless it has been ______.

Answer 4

Billed.

Question 5

What is a client bank account?

Answer 5

An account opened by the firm in the name of the firm, but used for client money.

Question 6

What word must be included in the title of a client bank account?

Answer 6

Client.

Question 7

What does Rule 2.3 state about paying client money into a client bank account?

Answer 7

Client money must be paid promptly into a client bank account

Question 8

What are the three exceptions to the general rule that client money must be paid promptly into a client bank account?

Answer 8

● 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;
● The client money represents payments received from the Legal Aid Agency (LAA) for the firm’s costs; or
● The firm agrees an alternative arrangement in writing with the client or the third party for whom the money is held.

Question 9

What is the limited exception contained in Rule 2.2?

Answer 9

When the only client money received or held falls within Rule 2.1(d) (money for fees and unpaid disbursements received prior to delivery of a bill) and the firm is liable for the disbursement and does not have a client bank account for any other reason.

Question 10

What does Rule 2.5 require in regards to returning client money?

Answer 10

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

What does Rule 4.1 require?

Answer 11

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

Question 12

What are the three requirements under Rule 4.3 for withdrawing money to pay for costs when holding client money?

Answer 12

● A bill of costs, or other written notification must be given to the client or the paying party;
● This must be done before transferring any client money from a client account to make the payment; and
● Any such payment must be for the specific sum identified in the bill of costs or other written notification and covered by the amount held for the particular client or third party.

Question 13

What are the risks highlighted by the SRA of billing for future work and disbursements and paying the money received into the firm’s business account?

Answer 13

● If the client decides to terminate the retainer and asks for the money to be repaid, can the money be paid back immediately?
● If the matter does not proceed, for example, the other side pulls out of a transaction, can the money be paid back immediately?
● Following the incapacity or death of a sole practitioner, can the money be paid back immediately?
● If the firm becomes subject to an insolvency event, and the client’s money is not held in a ringfenced client account, how will the client be able to progress their matter or pay any disbursements due if they have already paid in advance for these and the insolvency practitioner refuses to repay the client’s money because it is held in the firm’s business account?

Question 14

What does Rule 5 permit?

Answer 14

Money to be withdrawn from the client bank account “for the purpose for which it is being held.

Question 15

Under what three circumstances can client money only be withdrawn (Rule 5.1)?

Answer 15

● For the purpose for which it is being held;
● Following receipt of instructions from the client or the third party for whom the money is held; or
● On the SRA’s prior written authorization or in prescribed circumstances.

Question 16

What does Rule 5.3 state about withdrawals from the client bank account?

Answer 16

Withdrawals can only be made from the client bank account for a client if sufficient funds are held in the account for that client.

Question 17

What is a residual client account balance?

Answer 17

Money that the firm has not returned to the client at the end of the retainer and it is now difficult to return the money.

Question 18

What are the prescribed circumstances in which a withdrawal of client money can be made without prior authorization from the SRA?

Answer 18

A withdrawal of residual client balances of £500 or less on any one client matter, provided that the money is then paid to charity.

Question 19

What does Rule 3.3 state?

Answer 19

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

Question 20

What does the SRA warning notice on improper use of client accounts as a banking facility state?

Answer 20

Law firms, their managers, and employees should not allow the firm’s client account to be used to provide banking facilities to clients or third parties.

Question 21

What are three factors to bear in mind when considering why a client is asking their solicitor to receive funds, make a payment, or why they can’t make or receive a payment directly (according to the SRA warning notice)?

Answer 21

● Throughout the retainer, you should question why you are being asked to receive funds and for what purpose.
● You should always ask why you are being asked to make a payment or why the client cannot make or receive the payment directly themselves.
● You have a separate obligation to return client money to the client or third party promptly, as soon as there is no longer any proper reason for you to hold those funds (Rule 2.5 of the Accounts Rules).

Question 22

Rule 8.1(a) requires firms to maintain a _______ for each client.

Answer 22

Client ledger account.

Question 23

What must the client ledger account show?

Answer 23

● All receipts and payments of client money;
● All payments made by the firm from its own money on behalf of the client;
● The issue of bills to the client, and any receipts of money in payment of such bills.

Question 24

What does Rule 8.1(b) require firms to maintain?

Answer 24

A list of all the balances shown by the client ledger accounts of the liabilities to clients (and third parties) with a running total of those balances shown

Question 25

What does Rule 8.1(c) require firms to have?

Answer 25

A separate cash book which shows all transactions through client bank accounts.

Question 26

What do Rules 8.2 and 8.3 require firms to do?

Answer 26

Obtain bank statements for all client bank accounts and for the firm’s own business bank accounts at least every five weeks (Rule 8.2), and prepare bank reconciliation statements for the client bank accounts (Rule 8.3).

Question 27

What does Rule 8.4 require?

Answer 27

A central record of bills and other written notifications of costs to be kept in a readily accessible form.

Question 28

If a firm does not operate a client account what record-keeping requirements must they comply with?

Answer 28

Keeping a readily accessible central record of bills or written notifications of costs given as required by Rule 8.4.24

Question 29

A firm must keep client money ______ from the firm’s own money.

Answer 29

Separate.

Question 30

Subject to exceptions, client money must be paid into a client bank account _______.

Answer 30

Promptly.

Question 31

Firms must never withdraw more client money for a client than ______.

Answer 31

Is held in the client bank account for that client

Question 32

A client account cannot be used to provide ______.

Answer 32

Banking facilities.

Question 33

All dealings with client money must be ______.

Answer 33

Recorded.