Client Money and Client Accounts

Question 1

What is the full scope of client money as defined under Rule 2.1?

Answer 1

Client money is money held or received by a firm in the following situations:
1. Relating to regulated services for a client: Money specifically connected to legal or other professional services.

2. Third-party money:
   * Held as agent or stakeholder.
   * Held to the sender’s order (e.g., funds sent to the firm for onward transfer).
3. Trustee or specified office: Money held as part of a legal obligation, such as under a power of attorney or as a deputy for the Court of Protection.
4. Unbilled fees and unpaid disbursements:

• Funds received for the firm’s fees or expenses before a bill is issued.
• Treated as client money until invoiced and billed.

Example: A firm receives £1,000 on account of costs before issuing a bill. This is client money and must be kept in the client account.

Question 2

How do the rules distinguish between client money and the firm’s business money?

Answer 2

1. Client Money:
   * Includes unbilled fees, costs on account, and third-party payments.

• Must always be deposited into a client bank account.

2. Business Money:
   * Includes funds for billed fees or reimbursement for paid disbursements.

• Deposited into the firm’s business account.

3. Key Rule: Money is client money until a bill for fees or disbursements has been issued.

Question 3

What are the detailed requirements for client bank accounts?

Answer 3

1. Title: The account must include the word “client” to differentiate it from the firm’s business accounts.
2. Location: Must be opened at a bank or building society in England or Wales.
3. Segregation: Only client money is to be held in the account.
4. Accessibility: Funds must be available on demand unless otherwise agreed in writing.
5. Legal Protection: Under Section 85(2) of the Solicitors Act 1974, banks cannot use client money to offset the solicitor’s liabilities.

Question 4

What are the rules for paying client money into a client bank account and what are the exceptions?

Answer 4

1. Prompt Payment: Rule 2.3 requires that client money is paid into the client account “promptly.”

• Promptness is not explicitly defined but implies immediate action with modern banking capabilities.

2. Exceptions:
   * Trustee obligations conflict with depositing funds.

• Payments received from the Legal Aid Agency (LAA) for firm costs.
• Written alternative arrangements agreed with the client or third party.

3. Practical Examples:
   * Funds for a property transaction must go into the client account.

• Legal aid payments for counsel can be kept in the firm’s business account.

Question 5

What must firms do when receiving mixed payments (client money and firm money)?

Answer 5

1. Definition: Mixed receipts include both client funds (e.g., completion funds) and firm funds (e.g., billed fees).
2. Allocation: Rule 4.2 requires prompt allocation to the correct accounts.
3. Process:
   * If paid into one account (usually the client account), the firm must transfer the firm’s money to the business account promptly.

• Example: A client pays £300,000 for a property purchase (client money) and £1,360 for fees/disbursements (firm’s money). The firm must allocate these funds appropriately.

Question 6

Under what conditions can client money be withdrawn from the client bank account?

Answer 6

1. Bill or Notification: Rule 4.3 requires a bill or written notification of costs before withdrawing client money.
2. Purpose: Withdrawals must align with the purpose for which the funds are held.
3. Anticipated Disbursements:

• Funds billed for future disbursements may remain in the client account until paid.
• Risks to the client must be considered (e.g., firm insolvency).

4. Guidance: Leaving anticipated disbursements in the client account reduces risks to clients.

Question 7

What mechanisms are required to protect client money?

Answer 7

1. Segregation: Client money must be kept separate from the firm’s funds at all times.
2. Accounting Systems: Robust systems to track client money transactions and balances.
3. Reconciliation: Regular checks to ensure client money is accounted for accurately.
4. Controls: Internal audits and compliance with SRA rules.

Question 8

When and how must client money be returned to the client or third party?

Answer 8

1. When:
   * Rule 2.5 mandates the return of client money promptly once there is no longer a valid reason to hold it.

• This includes after case completion or resolution of third-party obligations.

2. Promptness: Firms should define and document their process for returning funds without unnecessary delays.

Question 9

What are the permitted uses of client money?

Answer 9

1. Purpose-Specific Use: Client money can only be used for the purpose it was intended (e.g., paying for a property or disbursements).
2. Reimbursements: The firm can reimburse itself for paid disbursements if the client has agreed to this use.
3. Prohibitions: Using client money to fund the firm’s operational costs or to cover overdrafts is prohibited.

Question 10

What constitutes improper use of a client bank account?

Answer 10

1. Banking Facility Misuse: Using a client account to provide banking services to clients or third parties is not allowed.
2. Delays in Legal Aid Payments: Retaining legal aid funds in a business account without transferring them promptly can breach rules.
3. Regulatory Breach: Failure to comply with Rule 4.1 regarding segregation of funds may result in penalties.

Question 11

What accounting records must be maintained for client money?

Answer 11

1. Transaction Records: Detailed logs of all funds received, held, and disbursed.
2. Ledger Entries: Clear separation of individual client funds within the client account.
3. Reconciliation Reports: Regular checks of client account balances against bank statements.
4. Compliance Audits: Reports submitted to regulators to demonstrate adherence to rules.

Question 12

What risks are associated with billing for anticipated disbursements?

Answer 12

1. Client’s Right to Refunds: If the client terminates the agreement, can funds be refunded promptly?
2. Transaction Failures: If a matter fails (e.g., property purchase cancellation), can funds be returned?
3. Firm Insolvency: Advance funds held in a business account are at risk in case of insolvency.
4. Regulatory Compliance: Improper advance billing may breach SRA rules and principles.

Question 13

What are the specific circumstances under which client money can be withdrawn from a client bank account?

Answer 13

According to Rule 5.1, client money can only be withdrawn in the following situations:

1. For the purpose for which it is being held:
   * E.g., paying disbursements related to a client’s case.
2. Following client or third-party instructions:
   * Requires written or otherwise clearly communicated authorisation.
3. With SRA written authorisation or prescribed circumstances:

• Examples include withdrawals for residual client balances under £500 to charity.
  Additional Notes:
• Rule 5.2: All withdrawals must be authorised and supervised.
• Rule 5.3: Withdrawals must not exceed the funds held for that specific client.

Question 14

What are the rules for handling disbursements when insufficient client funds are available in the client account?

Answer 14

• Prohibitions:
• Do not withdraw partial amounts from the client account.
• Do not transfer funds for one client to cover another.
• Options Available:
  1. Pay from the firm’s business account: The firm bears the expense and later seeks reimbursement.

2. Advance firm’s own money to the client: Treated as client money and subject to client money rules.
   Rules:

• Issuing a bill or written notification is required before transferring client money for firm costs.
• Firms must disclose intended uses to clients in advance.

Question 15

What are residual client balances, and how should they be managed, and what are the consquences of holding onto it ?

Answer 15

• Definition: Residual balances occur when funds remain in the client account after the matter concludes and cannot be returned promptly (e.g., untraceable clients, deceased clients without known executors).
• Rule 2.5: Client money must be returned promptly once there is no reason to retain it.
• Prescribed Withdrawals for Balances under £500:
• Allowed without SRA authorisation if:

1. Reasonable steps were taken to return the funds.
2. The balance is donated to charity.
3. Proper records are maintained.
   * Balances over £500: SRA authorisation is required before withdrawal.

• Consequences of Mismanagement:
• Retaining client money improperly is considered a serious breach of SRA rules and often results in qualified accountant reports.

Question 16

Why is using a client account as a banking facility prohibited? give some examples of improper use of a client account , and what are the implications?

Answer 16

• Rule 3.3: A client account must not be used to provide banking facilities for clients or third parties.
• Permissible Use:
• Funds must relate to regulated legal services, such as disbursements or transaction-related payments.
• Examples of Improper Use:
• Holding money for convenience or to manage routine expenses.
• Transferring funds unrelated to legal work, such as personal payments or family gifts.
• Implications of Breach:
• Breach of SRA Principles, including:
• Integrity (Principle 5).
• Public trust (Principle 2).
• Risk of facilitating money laundering.
• Disciplinary action, including fines or suspension.

Question 17

How does Rule 3.3 help mitigate money laundering risks?

Answer 17

Rule 3.3 of the Solicitors Regulation Authority (SRA) Accounts Rules 2019 specifically prohibits the improper use of a client account as a banking facility. This rule aims to prevent solicitors from acting as an unregulated bank or financial intermediary for clients.

• Prevention: Restricts improper use of client accounts, reducing opportunities for laundering illicit funds.
• Indicators of Risk:
• Repeated deposits and withdrawals without clear purpose.
• Large, unexplained sums moved through the client account.
• Payments to overseas entities without justification.
• Case Example:
• Attorney General of Zambia v Meer Care & Desai: A solicitor’s client account was used as a “money park,” facilitating fraud. This misuse was deemed improper even without direct dishonesty.

Question 18

What accounting systems must firms maintain for managing client money?

Answer 18

1. Client Ledger Accounts (Rule 8.1(a)):
   * A separate ledger for each client, recording:
   * All receipts and payments.
   * Payments made by the firm on the client’s behalf.
   * Issued bills and associated payments.
2. List of Balances (Rule 8.1(b)):
   * A running total of all client account balances.
3. Cash Book (Rule 8.1(c)):
   * A central record of all transactions through the client bank account.
4. Bank Statements and Reconciliation (Rule 8.3):
   * Obtain statements for client accounts at least every five weeks.
   * Reconcile client bank accounts with internal records regularly.

Question 19

Why are bank reconciliations important, and how should discrepancies be managed?

Answer 19

1. Purpose:
   * Ensure records match actual bank transactions.
   * Detect errors, fraud, or breaches of client money rules.
2. Process:
   * Update the cash book with unexpected items (e.g., dishonoured cheques).

• Adjust bank statements for pending transactions (e.g., uncashed cheques).
• Investigate and resolve discrepancies promptly.

3. Importance:
   * Reconciliations often reveal early signs of non-compliance or systemic failures.
   * Failure to reconcile is a serious regulatory breach.

Question 20

What lessons can be learned from significant cases involving misuse of client accounts?

Answer 20

1. Fuglers & Others v SRA (2014):
   * Used client accounts for an insolvent football club’s transactions.

• Fine: £50,000 for providing unregulated banking services.

2. Premji Naram Patel v SRA (2012):
   * Processed investor funds unrelated to legal work.
   * High Court upheld a £7,500 fine.
3. Attorney General of Zambia v Meer Care & Desai (2008):

• Funds unrelated to legal services were moved through client accounts, enabling fraud.
• Highlighted the dangers of using client accounts as “money parks.”

Question 21

What risks are associated with retaining residual balances improperly?

Answer 21

1. Breaches:
   * Retaining funds violates Rule 2.5, which mandates prompt return of client money.

• Failing to handle balances may breach Rule 3.3 if funds are used inappropriately.

2. Consequences:
   * Qualified accountant reports.
   * Regulatory penalties for non-compliance.
3. Proper Management:
   * Attempt to trace clients or executors.

• For balances under £500, donate to charity with proper records.
• Obtain SRA approval for larger amounts.

Question 22

What central records must firms maintain under the SRA rules?

Answer 22

1. Bills and Notifications of Costs (Rule 8.4):

• Maintain a central, accessible record of all bills issued to clients.

2. Reconciliation Records:
   * Keep detailed records of all client account reconciliations, discrepancies, and resolutions.
3. Accessibility:
   * Ensure all records are readily available for audits and regulatory checks.