*DISTINCTION LEVEL* Alice Hicks style colourful summary with full client ledger examples and references to the textbook chapters/paragraphs for the exam. Also financial summary examples and full detail of the rules. University of Law Exam Ready!
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IPP SAC WS1/2
Solicitor’s Accounts
The SRA Accounts Rules 2019
Who is bound?
Rule 1.1 sets out who is governed by the Rules.
The Rules apply to authorised bodies, their managers and employees.
The authorised body’s managers are jointly and severally responsible for compliance with the Rules.
Licensed Body = the rules apply only in respect of activities regulated by the SRA in accordance with
the term of its license. Rule 1.2 and Rule 1.3
Weston v The Law Society (1998) solicitor was struck off due to being liable for breaches of
the Rules committed b his fellow partners even though he had been unaware of them. Lord
Bingham of Cornhill, “the duty of anyone holding anyone else’s money to exercise a proper
stewardship in relation to it.” = those responsible for compliance in a firm must be very careful.
Client Money
Rule 2-4 divides money sets out what an authorised body (firm) must do with client money
Rule 4.1
Rule 4.1 requires client money to be kept separately from the money belonging to the firm – usually client bank account.
Client = “the person for whom you act.”
Rule 2.1
Rule 2.1 states that 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;
(b) and (c) extends the meaning of client money.
Challinor and others v Juliet Bellis & Co and Another [2013] solicitor has the duty to clarify any ambiguity
as to whom client money is held for.
‘Fees’ = “your own professional charges or profit costs (including any VAT element)’
‘Disbursements’ = any costs or expenses paid or to be paid to a third party on behalf of the client or trust
(including any VAT element) save for office expenses such as postage and courier fees.
‘costs’ = fees and disbursements and covers both.
(d) in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same.
Money received for all fees and disbursements paid to the firm are considered client money unless and until
they are billed. So must be held in a client account.
Usually referred to generally as money received “generally on account of costs”
NOTE: THEREFORE under 2.1(d) once billed professional charges and disbursements are outside of client
money and becomes business money
Client money does not include money received for disbursements which have already been paid, so where money is
received in reimbursement of such a payment, it is a receipt of business money by the firm – so paid into business
account.
BUSINESS MONEY = money received for disbursements that has already been paid and money received after being
billed
1
,IPP SAC WS1/2
Client Bank Account 1
Rule 3.1 requires such an account to be at a bank or building society in England and Wales
Rule 3.2
Rule 3.2 requires the account to include the word ‘client’ in its title to distinguish it from the firm’s own business
accounts
S85(2) of the SA provides that a bank does not have any recourse or right against client bank account
Rule 3.3
Rule 3.3 prohibits the use of a client bank account to provide banking facilities to clients or third parties . Payments
into, and transfers or withdrawals from, a client account must relate to the provision of regulated services.
Funds can only be received into the client bank account where there is a proper connection between
receipt of the funds and the delivery of regulated services - depend on the facts of each case, but
simply having a retainer with a client is insufficient to allow for processing funds freely through the
client bank account.
The question to ask is whether there is any justification for money to pass through the client bank
account when it could be paid directly by the client?
Is a breach of SRA and could result in money laundering
Paying Client money into Client Bank Account 2
Rule 2.3: client money must be paid ‘promptly’ into a client bank account.
Exceptions:
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, where firms
can take into their own business account; or
o When receiving payments for the LAA in the business account, there is no requirement for the funds to be
transferred to the client account
o But money cannot be held indefinitely, and holding out in paying things cannot delay client’s matter
Rule 2.3(c) the firm agrees an alternative arrangement in writing with the client, or the third party, for whom the
money is held. You must record the receipt because you are dealing with client money - rule 8.1a CLASSIC EXAMPLE
Rule 2.2 – a further exception of 2.3
Rule 2.2 where client money received falls in Rule 2.1(d) (money for fees and unpaid disbursements are received prior
to delivery of a bill). Provided any money received for disbursements relates to expenses incurred on behalf of the client
for which the firm is liable and the firm does not have a client bank account for any other reason, the money can be held
outside a client bank account, but the firm must inform the client in advance.
EXAMPLE: Unpaid disbursement for which the firm would be liable is where a firm has an account at the Land Registry
and pays monthly for searches or where the firm has instructed counsel on behalf of a client then the money can be held
outside a client bank account if client is informed.
Rule 2.4
Rule 2.4: requires firms to ensure that client money is available on demand unless an alternative arrangement is
agreed in writing with the client or the third party for whom the money is held. This requirement means that firms
should not tie up client money in deposit accounts which require extended notice periods.
Rule 2.5
Rule 2.5: requires 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.
1
9.5 – 9.6
2
9.7
2
,IPP SAC WS1/2
Keeping Client Money Separate from the Firm’s own bank account3
Rule 4.1 : requires client money to be kept separate from the firms own money
Rule 4.2 dealing with mixed receipts
Rule 4.2 when a firm receives a mixed payment this states that the firm must allocate funds ‘promptly’ to the correct
bank account = just has to be correct unlike the old rules which focuses on where the account was originally paid.
If a solicitor did not follow this they may be in breach of honesty and integrity of the SRA Code
EXAMPLE Where a firm sends a bill for its fees and disbursements to a client with a completion statement. The money the
client sends for completion is client money, the money for the fees and billed disbursements are the firm’s own money.
o Options A: split client money immediately into client bank account and remainder into firms own.
o Option B: whole cheque paid into one account and funds moved promptly into the other account.
o Note also that you can choose which account to pay into first.
Rule 4.3 moving money from client business bank account for fees and disbursements 4
Until a bill is issued for professional services/fees/disbursements the money is client money and must be paid into the
client bank account.
Where the firm is holding money in the client bank account generally on account of costs and issues a bill it should transfer
the money promptly to the business account.
Rule 4.3 deals with withdrawing client money and provides:
Where you are holding client money and some or all of that money will be used to pay your costs:
a) you 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
SRA GUIDANCE Taking money for your firm’s costs September 2020 = where the bill includes anticipated disbursements
which have not yet incurred it will not be a breach of Rule 4.3 by leaving money associated with the anticipated
disbursements in the client bank account until such time as they are paid.
So the rules permit monies to be transferred from the client bank account if a bill has been given to the client for work to
be undertaken in the future
Also permits billing for future work and disbursements and paying the money received into the firms business account
there are some risks:
o such as if the firm became insolvent and
o generally issues resolving around can the money be repaid immediately such as death of a sole practitioner
lawyer or client terminating the retainer
EXAMPLE: a property transaction firm issuing a bill including amount required for SDLT and Land Registry fees due on
completion. Now that a bill is issued this should be transferred promptly to the business account however rule 4.3 and the
SRA guidance provides that as these are anticipated disbursements, they can remain in the client bank account until they
are paid.
The rules make it impossible to transfer money held in a client bank account to cover disbursements prior to giving the client
the bill BUT SRA GUIDANCE SEPTEMBER 2020 states that Rule 5 permits money to be withdrawn from the client bank ‘ for
the purpose for which it is being held’ – so just need to make clear to the client beforehand
NB: Rule 5 will not permit a transfer where disbursements have not yet been incurred or not yet paid by the firm
EXAMPLE: firms wanting to move money from the client account to reimburse themselves for disbursements which have
already been paid on behalf of the client using firms own money such as Land registry search (often by direct debit). Firm
has to make clear to the client that money paid generally on account of costs may be used to reimburse the firm for
payments made without issuing a bill – e.g in a client care letter.
SEE TEXTBOOKS FOR FURTHER EXAMPLE PG 102
3
9.8
4
9.8.3 pg 100
3
,IPP SAC WS1/2
Withdrawals of Client Money from the Client Bank Account 5
Rule 5.1: client money can only be withdrawn in one of the following circumstances :
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.
Rule 5.2 – authorisation
Rule 5.2: requires all withdrawals to be appropriately authorised and supervised.
Rule 5.3 & Rule 6 – Sufficient funds
Rule 5.3: withdrawals can only be made from the client bank account for a client if sufficient funds are held in the account for
that client. If more is taken for one client than they have on account, this wrong balance represents money held for other
clients.
If there is a wrong balance – Rule 6: Errors must be corrected promptly upon discovery and any money improperly
withdrawn must be immediately replaced.
If insufficient funds options are:
o Full payment can be made from the firms business bank account OR
o The firm can advance its own money to the client and the client can pay it off – the money lent to the client
becomes client money. This is only useful if client is a little bit short on making the payment. OR
o The firm can make the payment using two cheques part from the business bank and account and part client
Rule 5.1 (c) relates to residual balances
A residual client account balance arises where money was not returned to the client at the end of a retainer and cannot now
be returned because the client cannot be identified or traced. Firms should very rarely be holding residual client account
balances.
Rule 5.1 (c) allows client money to be withdrawn from the client bank account on the SRA’s prior written
authorisation or ‘in prescribed circumstances’. These prescribed circumstances are detailed in a mandatory
statement and apply for balances > £500 – page 104 e.g charity and reasonable steps taken to find the owner
Paying interest to clients6
Rule 7.1
Rule 7.1 requires firms to account to clients for a fair sum of interest on any client money held on their behalf.
Rule 7.2
Rule 7.2 allows firms to agree otherwise with clients, but the agreement must be in writing and the firm must provide
sufficient information to enable clients to give informed consent
Client Accounting systems and Controls 7
The client bank account will contain client money held for many different clients so necessary for firms to maintain
accurate records = Rule 8 All dealing with client money need to be recorded
SRA Guidance on Accounting systems 25 November 2019 – accounts should be maintained on the double entry principle.
Firms should have clear procedures for ensuring that all withdrawals from client accounts are properly authorised.
Rule 8.1(a)
Rule 8.1(a): requires firms to maintain a client ledger account for each client identified by their name and an appropriate
description of the matter.
The client ledger account must show:
o all receipts and payments of client money;
o payments made by the firm from its own money on behalf of the client;
o issue of bills to the client; and
o any receipts of money in payment of such bills.
Rule 8.1(c)
5
9.9 pg 102
6
9.11
7
9.9 pg 102
4
,IPP SAC WS1/2
Rule 8.1(c): requires firms to have a separate cash book which shows all transactions through client bank accounts.
o Bank statements must be obtained at least every five weeks
o the statements must be reconciled with the cash book and client ledger accounts every five weeks.
o Any discrepancies revealed by the reconciliation must be investigated promptly.
Rule 8.2
Rule 8.2: requires firms to obtain bank statements for all client bank accounts and for the firm’s own business bank accounts
at least every five weeks
Rule 8.3
Rule 8.3: requires them to prepare bank reconciliation statements for the client bank accounts at least every five weeks.
Rule 8.4
Rule 8.4: requires a central record of bills and other written notifications of costs to be kept in a readily accessible form.
Entries for recording simple client transactions8
Two sets of accounting records
Rule 8 sets out the recording requirements of the Rules.
Two sets of separate accounts,
1. one for client money and
2. one for business money – ordinary business account
The format of the accounts
Requirements as to formats
o they are based on the principles of double entry bookkeeping.
The dual cash account
o Anyone running a business needs a cash account to record dealings with each bank account.
Rule 8.1(c), a law firm must keep a cash account for dealings with the client bank account. (cash ledger,
client bank account)
There is NO rules to keep a separate cash account for dealings with the business account but obviously
no business can function without a record of cash received and spent. (cash ledger, business account)
o = THEREFORE law firm will need at least two separate cash accounts.
o normal format is to have the two individual cash accounts on the same page next to one another.
o One set of columns for ‘Date’ and ‘Details’ will do for both accounts.
The dual ledger account for each client (client ledger account)
o Rule 8.1 requires a dealing with client money on behalf of a client must be recorded, issues of bills to a client,
payments of the firm’s own money on behalf of clients and receipts in payment of bills to be recorded.
o must be two ledger accounts for each client:
one to show dealings with business money on behalf of that client, such as issuing of bills to a client,
payments of the firms own money on behalf of clients and receipts in payment of bills to be recorded
(client ledger business account) e.g the firm pays on behalf of client.
and another to show dealings with client money for that client (client ledger, client account) e.g client
sends a cheque made out to the firm for XX this will go in client ledger client account this is client money
Client name: Matter:
8
Chapter 10 page 109
5
, IPP SAC WS1/2
Date Details Business account Client account
DR CR BAL DR CR BAL
June Balance
Money
Client name. On account Pay off
1 June received from
of costs debt *
client
Cash account
Date Details Business account Client account
DR CR BAL DR CR BAL
June Balance
Paying off clients’ Money
1 June Cash. On a/c costs debts * received from
client
Dealing with receipts of First decide whether you are receiving business money or client money
money (e.g receiving client The entry in the cash account for a receipt is a DR entry = you are receiving
money like on account of The corresponding CR entry is in the ledger account of the client from whom, or on whose
costs or money received
behalf, the money is received.
from settlement)
o Receipts of client money will be held in the client bank account for the relevant
client.
o Receipts of business money will reduce the indebtedness of the relevant client to
the firm. It would be the same as the above but just in the business account section.
EXAMPLE: A solicitor has received £480 in payment of the firm's bill for professional charges
and VAT. This is purely a receipt of money. Entries are made on Profit costs and HMRC when
bills are issued.
Dealing with payments of First decide whether you are making the payment from the firm’s own business bank
money e.g client sending account or from its client bank account so that the payment can be recorded in the
you cheque for a bill = appropriate cash account
business money
The entry on the cash account is a CR entry and the corresponding double entry is a DR in
the ledger account of the client on whose behalf the payment is made = balance on the
office columns of the client ledger will show that the client owes the firm money, ie, is a
debtor.
o * OR the payment can be made from the client bank account if there is enough
money so would be DR on the client account client section and CR on the cash
account client section
o Rule 5.3 a payment must not be made from the client bank account unless the firm
is holding sufficient funds in the client bank account for that client.
Dealing with professional When firm deliver/ issues bill to client, will include item for professional charges, and
charges (PC is also called profit VAT 20% on those charges. (note when billing not talking about receiving
costs/ income ledger account)
money/payment)
The solicitor want to make the following dual entries in the accounts:
1. The client owes the firm the charges and the VAT.
o At this stage, there is no movement of cash, so no entry is made in the cash account
o On the client ledger account, the bookkeeper must make DR entries for professional
charges and VAT in the business section.
o The entries must be made in the business section (even if the solicitor holds client
money). Because the purpose of the DR entries is to show that the client has
6
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