Client Money and Client Accounts Flashcards
What is the key rule around ‘client money’ in the SRA Accounts Rules?
Client money must be kept separate from money belonging to the firm (ie in a separate client bank account)
What is defined as client money?
Client money is 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 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 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
- This means that all money received for fees + disbursements paid to firm are considered client money unless and until billed
- Referred to as money ‘generally on account of costs’
What is meant by fees, disbursements and costs?
1) Fees = charges or profit costs including VAT
2) Disbursements = any costs or expenses paid or to be paid to a 3rd party on behalf of the client or trust (including VAT), save for office expenses
- Disbursements that have already been paid, like where a payment by the firm is reimbursed by a client, this is business money and will be paid into a business bank account
3) Costs = fees and disbursements, so covers both
Where should client money be kept + what are the rules around this?
Client bank account is one opened by the firm in its name, but is used for client money
- Must have the word ‘client’ in its title – banks cannot take money from this to satisfy a debt the firm has
Client money should be available on demand, unless another written arrangement is agreed with the particular client
What is the general rule around paying money into the client bank account?
Client money must be paid promptly into a client bank account
What constitutes ‘promptly’ will depend on circumstances, but it is typically immediately
What are the main exceptions to the general rule around paying money into the client bank account?
(a) 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
- Firms can receive these payments into their own business bank accounts, but they cannot retain them indefinitely and must spend these payments as necessary to progress the client’s matter
(c) the firm agrees an alternative arrangement in writing with the client, or the third party, for whom the money is held
What is the further limited exception to the general rule around payment of client money into the client bank account?
Where the only client money received or held is money for fees or unpaid disbursements + firm is liable for disbursement + it does not have a client bank account for any other reason
- Cannot apply if they get any other type of client money
If these conditions met, firm could hold money outside client bank account, but must inform client where and how it will be held
Example of unpaid disbursement may be a Land Registry monthly fee for searches
What are the rules around returning client money?
Client money should be returned promptly as soon as there is no longer any proper reason to hold the funds – firm should make their own decisions about what ‘promptly’ means
Where a transaction is aborted, usually advisable to return money to client unless a new transaction is actively being put in place or some other factor justifying the holding of the funds
What are the rules when a firm receives money for fees and client money in one payment (mixed receipt)?
Where a firm receives a mixed payment with client money + money for a bill, the firm must allocate funds promptly to the correct bank account
- Rules allow it to be paid all into one or the other, before being properly transferred
What are the rules around moving money for fees and disbursements?
1) Firms might request money generally on account of costs, which is client money until a bill is issued
- Once issued, they should transfer the money to their business account promptly
- If the bill contains an unpaid future disbursement, they can leave the money for these within the client bank account without breaching any Rules
2) Where a firm is holding client money and some or all that money will be used to pay the firm’s costs:
- (a) they must give a bill of costs, or other written notification, to the client or the paying party;
- (b) this must be done before you transfer any client money from a client account to make the payment; and
- (c) 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
Can firms bill for anticipated fees and disbursements?
Firm might send a bill to a client for anticipated future fees and disbursements, which means they could go into the business bank account (as they’ve been billed for)
There is guidance about being cautious in doing this, because the money should be capable of being paid back immediately if something goes wrong (retainer terminated, aborted transaction, if firm goes insolvent, what will happen?)
What are the rules around firms transferring money for paid disbursements without issuing a bill?
Firms are permitted to withdraw money from the client bank account ‘for the purpose for which it is being held’
This means if the client knows the client money may be used to reimburse the firm for payments made, they can transfer it to the business account without issuing a bill
- Useful where firm pays for a court fee using its own money and they want to reimburse themselves without having to issue a bill, which might become burdensome to do this every time, for each client
In what circumstances can client money be withdrawn?
Client money can only be withdrawn:
- (a) for the purpose for which it is being held; or
- (b) following receipt of instructions from the client or the third party for whom the money is held; or
- (c) on the SRA’s prior written authorisation or in prescribed circumstances.
All withdrawals to be appropriately authorised and supervised
What are the firm’s options if they have client money on account of costs, but this isn’t enough to cover a disbursement?
Can only withdraw for one client what is held in the account for them – taking more would be taking from another client and would be a breach of the Rules
Where a firm is holding client money generally on account of costs and a disbursement costs more than what’s in the client account, the firm cannot make the payment from the client bank account
- Firm can either pay the disbursement fully themselves. They cannot take money from the client account to partially reimburse themselves, unless a bill is issued or the client is aware that the money would be used this way
- Or, firm can advance its own money to the client, which becomes client money (useful where there is almost enough client money in that account)
What are the rules around a residual client account balance?
1) This is money that the firm has not returned to the client at the end of the retainer, where the client is difficult to trace, or they have died and their executors are unknown, or client won’t accept money
- Rare, as client money should be returned promptly as soon as there is no longer a proper reason to hold the funds
2) In these circumstances, residual client balances of £500 or less can be withdrawn without prior SRA authorisation, if the money is paid to charity
- Firm must have taken reasonable steps to return the money and keep proper records of what has been done
3) Residual client balances of over £500 - firm needs SRA authorisation for withdrawal
What are the rules around improper use of a client bank account as a banking facility?
Client bank account must not be used to provide banking facilities for clients or 3rd parties
- Payments and withdrawals must relate to provision of regulated services
- Making a transfer of funds from this to settle an unrelated debt or to give to a 3rd party will lead to a failure to comply with the prohibition – breach of various SRA Principles
What guidance has the SRA issued in relation to the prohibition around using client account as a banking facility?
Firms cannot use a client account to provide banking facilities to clients or 3rd parties, but they can make usual and proper payments from the client bank account which are related to a transaction
Receiving funds into the client account should only be done where there is a proper connection between the receipt of funds + delivery of regulated services
- An underlying transaction alone is insufficient if handling money has no connection to that service
Solicitors should consider why they are asked to receive funds and why and why they are being asked to make payments/why the client cannot make the payment themselves
What are the various SRA rules around what accounting systems and controls a firm must have?
1) Firms must maintain a client ledger account for each client, identifiable by name and appropriate description of the matter
- Must show all receipts and payments of client money
- Must record any payments made by the firm from its own money on behalf of the client
- Must record the issue of bills to the client and receipts of money as payment of these bills
2) Firms must maintain a list of all balances shown by the client ledger accounts of the liabilities to clients, with a running total of those balances shown
3) Firms must have a separate cash book which shows all transactions through client bank accounts
- No requirement for a cash book for dealings with firm’s own money
4) Firms must obtain bank statements for all client bank accounts and for the firm’s own business bank accounts at least every 5 weeks + firm must prepare bank reconciliation statements for the client bank accounts
- A bank reconciliation statement is a document that compares a company’s cash balance in its records to the corresponding amount on its bank statement, identifying and resolving any discrepancies promptly
- The client account reconciliations often raise the first red flags if something in the firm’s record keeping has gone wrong
5) Firm must keep a central record of bills in a readily accessible form
