Professional Conduct: Solicitor Accounts

Question 1

When must you obtain and deliver an accountant report?

Rule 12.1

Account Rule

Answer 1

• If during the accounting period you
• held or recieved client money
  ….
  You must obtain an accountant report for the period within 6 months of the end of the period; and deliver it to the SRA.
  ….

Exemptions whereby no report is needed:

• All client money is from the Legal Aid Agency
• The average balance on client accounts does not exceed £10,000 and the maximum balance does not exceed £250,000

Question 2

When can the SRA require an authorised body to obtain an accountatn report on reasonable notice?

Rule 12.4

Answer 2

1. If the authoriused body has ceased to operate as an authorised body and to hold or operate a client account (i.e a final report); or
2. If it is in the public interest

Question 3

For how long must you retain and store all accounting records?

Rule 13.1

Answer 3

At least 6 years

Question 4

What is a joint account?

Rule 9.1

Answer 4

Joint accounts allow solicitors to operate/manage the account and money along with another person (e.g. another law firm, the client, a third party)

Question 5

For the purpose of record keeping and SRA Accounts, what is the impact of using a Joint Account?

Rule 9.1

Answer 5

• A joint account is not a client account. However, the money held in a joint account is still client money.
• Always note that since someone else will have equal access, the risks are higher than if kept in a client account. Therefore, action needs to be taken to mitigate risks.
• The SRA Account Rules that (a) you must obtain every 5 weeks statements from the banks; and (b) to keep an accessible central record of all bills, applies to Joint Accounts too.

Question 6

What if you operate the client’s own account as opposed to a law firm client account?

Rule 10.1

Answer 6

As with joint accounts, if you operate the clients own account, you must obtain bank statements every 5 weeks.

You additionally have to complete (every five weeks) a reconciliation of the bank statement balance with the cash book and client ledger.

Question 7

What are Third Party Managed Accounts (TPMA)?

Rule 11.1

Answer 7

Accounts at banks and building societies held in names of third parties who are authorised payment institutions regulated by the FCA and operate as an escrow payment service where the third party recieves and pays money on the client and/or authorised body’s behalf.

Question 8

Is money held in a TPMA client money?

Rule 11.1

Answer 8

No. It is not client money because it is not held or recieved by the authorised body,

However, the authorised body must ensure the client is informed and understands the contractual arranegements regarding the TPMA (e.g. right to terminate) and ensure they obtain regular statements from the TPM

Question 9

What is the main rule when it comes to storage of client money?

SRA Account Rule 4.1

Answer 9

Keep client money separate from money belonging to the authorised body (law firm)

Question 10

What is client money?

Answer 10

Client money is money held or received by a law firm:

• For regulated services delivered by you
• On behalf of a third party in relation to regulated services
• As a trustee or the holder of an office eg donee of power of attorney or trustee of pension scheme
• In respect of fees and unpaid disbursements if held or received prior to delivery of a bill

Question 11

What is a client has paid a bill (disbursment) - is that client money?

Answer 11

No. Client money is that recieved in respect of unpaid disbursments.

Question 12

What is the bank account called used to seperate client and firm money?

Answer 12

Client Account

Question 13

What are the rules surrounding the details of a client account?

Rule 3.1

Answer 13

• Bank or Building Society in England and Wales
• Name of the account must include (i) name of the firm; and (ii) the word ‘client’

For example, ‘Northfields LLP Client Account’

Remember, client account is a bank account belonging to the law firm in which it puts client money in. The account itself does not belong to the clients.

Question 14

What payments can be made into/out of a client account?

Rule 3.3

Answer 14

Any payments, withdrawals or transfers must be made in respect of the delivery of legal services to the client

Question 15

What is the main rule when it comes to timing of client money?

SRA Account Rule 2.3

Answer 15

You ensure that client money is paid promptly into a client account.

Question 16

What are the three exceptions to needing to pay client money into a client account ?

Answer 16

1. Money held as a trustee or as the holder of a specified office (e.g Court of Protection Deputy) does not need to be paid into the client account if to do so would conflict with regulations regarding the office
2. If the client money represents payments from the Legal Aid Agency for your costs
3. If you agree an alternative arrangment in writing with the client, or third party, for whome the money is held not to hold it in the client account

Question 17

What if the authorised body (law firm) does not have a client account?

Rule 2.2

Answer 17

If…
* The client money is only advance payments for fees and unpaid disbursements for which you are liable (e.g. counsel fees, but not disbursments for which the client is liable such as SDLT); and
* The client has been properly advised,

…. the money need not be held in a client account. However….

• The client money needs to be returned promptly as soon as there is no reason to hold the money
• The authorised body must have given the client a bill; and
• The body should keep records showing receipt and payments of client money in the client ledger

Question 18

What happens if client money is improperly witheld?

Rule 6.1

Answer 18

If money is improperly withehld, money must be immediately paid into the client account.

Question 19

What about interest on tje client account?

Rule 7.1

Answer 19

You must account to clients for a fair sum of interest on any client money held on their behalf

Question 20

How should money from mixed payments comprising both client and non-client money be dealt with?

Rule 4.2

Answer 20

The money needs to be split and allocated either to the client account or the business account used to hold non-client money belonging to the authorised body.

However, if mixed money is paid into the business account, you must promptly move the client money into the client account. Likewise, vice versa. However, this is not a breach because mixed money is allowed to be temporarily mixed. so long as rectification is prompt!

Question 21

Where is non-client money paid?

Answer 21

Business Account

Question 22

When can you withdraw money from a client account?

Rule 5.1 and .3

Answer 22

Only…
* For the purpose for which it is being held; or
* Following receipt of instructions from client or third party for whom the money is held; or
* On the SRAs prior written authorisation

Further, money can only be withdrawn if that particular client has sufficient funds within the client account for the withdrawal, since otherwise you would be withdrawing another client’s money

Question 23

Imagine the client account has 500k in. Client X only has 20k in the client account. Can you make a withdrawl of 25k for Gs purpose?

Answer 23

No. Withdrawing 25k from the client account would mean that you are using 5k from another client in violation of Rule 5.3

Question 24

What must you do if there is no longer any reason to hold client money?

Rule 2.5

Answer 24

Return it promptly to the client

Question 25

How to transfer from client account to pay a bill of costs?

Answer 25

If money in the client account is to be used to pay a bill of costs, then provided the bill has been given to the client before transfer, the money can be transfered to the business account so long as only the specific sum identified in the bill is transferred, and provided the client has sufficient money in the client account.

Question 26

What is double entry principle?

Rule 8.1

Answer 26

Each transaction involves two entries into the account.

• One must be a debit entry
• One must be a credit entry

For client money in/out of the client account, it will be recorded in the:
* Client Ledger Client Account
* Cash Sheet Client Account

For non-client money in/out business account, it will be recorded in the:
* Business Account
* Client Ledger Business Account

Question 27

What does the client ledger client account record?

Answer 27

Transactions of client money into/out of the client account

Question 28

What does the Client Ledger Business Account record?

Answer 28

Transactions of non-client money into/out of the business account

Question 29

What does the Cash Sheet Client Account record?

Answer 29

Money paid into or taken out of the client account

Always remember, this is from the law firm perspective.

If we credit the client side ledger, we debit the cash sheet slient account.

Question 30

What does the Cash Sheet Business Account record?

Answer 30

Bills of costs issued to clients and any reductions in those bills

Question 31

What entries are made when we receive client money?

Answer 31

• Credit Client Ledger Client Account
• Debit Cash Sheet Client Account

The client is in credit for sending money so we add credit to the ledger. We then debit the CSCA.

Question 32

Why, when client money is recieved, is the cash sheet client account debitted?

Answer 32

A debit represents an increase in assets. The firm now holds more cash.

The debit reflects this increase in the firm’s resources held on behalf of the client.

Question 33

What entries are made when we PAY OUT client money?

Answer 33

• Debit the client ledger client account
• Credit the cash sheet client account

Money comes out of the client account (debit the ledger so that there is ‘less credit’ and then since the assets held by the firm have decreased, we credit the cash sheet client account.

Question 34

What entries are made when we recieve non-client money?

Answer 34

• Credit client ledger busiess account
• Debit cash sheet business account

Question 35

What entries are made when we pay out non-client money?

Answer 35

• Debit client ledger business account
• Credit cash sheet business account

Question 36

How are balances discovered?

Answer 36

• The balance on the client side of a client’s client ledger account shows how much money in the client account belongs to that client.
• The client cash book balance should equal the bank statement for the client account showing how much in total is in the client account and should equal the total balances on all the client ledgers (client side).

Question 37

When money is transferred between accounts, how many entries are needed?

Answer 37

2 sets of double entries (4)

One set to withdraw the money from one account

One set to pay the money into the other account.

Question 38

How do we record a transfer from client account to business account?

Answer 38

• Debit client ledger client account for that client
• Credit cash sheet client account

and

• Credit client ledger business account for that client
• Debit cash sheet business account

Try to remember we debit the cash sheet when the firm/account increase assets. It makes sebse the business account is debitted because money is coming into the business account

Question 39

How do we record a transfer from a business account to client account

Answer 39

• Debit the client ledger business account
• Credit cash sheet business account

and

• Credit the client ledger client account
• Debit cash sheet client account

Question 40

How do we transfer client money from the client account to a separate designated client account?

Answer 40

• Debit client ledger client account
• Credit cash sheet client account

AND

• Credit client ledger separate designated account
• Debit cash sheet seperate designated client account

Question 41

How do we transfer client money from a separate designated client account to the client account

Answer 41

• Debit client ledger seperate designated account
• Credit cash sheet seperate designated account

AND

• Credit client ledger client account
• Debit cash sheet client account

Question 42

How do we transfer money remaining in the client account between two clients?

Answer 42

If you act for two clients and a transfer of client money is being made from one client to the other, the client money being transferred is already in the firm’s client account

There is no need to take the money out of the client account and then pay it back into the same account. You can transfer money between two clients of the firm in one step.

• Debit client ledger client account for tranferring client
• Credit client ledger client account for the client to whom money is being transferred

Question 43

How do we split mixed payments?

Answer 43

The same as the usual rules but we need to do it twice once the cheque is split…

For the client money….
* Credit client ledger client account
* Debit cash sheet client account

For the non-client money…
* Credit client ledger business acount
* Debit cash sheet business account

Question 44

How do we record deposit monies received by buyer’s solicitor from buyer?

Answer 44

The usual client money recieved entry:

• Credit client ledger client account for that (buyer) client
• Debit cash sheet client account

Question 45

How do we record deposit monies paid out by buyer’s solicitor to seller’s solicitor?

Answer 45

The usual client money out entry:
* Debit client ledger client account for that (buyer) client
* Credit cash sheet client account

Question 46

How do we record receipt of deposit monies by seller’s solicitor to be held as stakeholder at exchange?

Answer 46

The money recieved by the seller’s solicitor is money recieved is client money that is paid into the client account.

When acting as stakeholder, the deposit money cannot be handed over until the sale completes. However, the deposit cannot be allocated to the shareholder as this would indicate they can do whatever they wish with the money.

Therefore, we create a seperate ‘staeholder ledger’ > Deposit money is not credited to the seller’s client’s own client ledger client account until completion day.

Upon Receipt:
* Credit stakeholder ledger
* Debit cash sheet client account

Upon Completion
* Debit stakeholder ledger
* Credit client ledger cash account