A candidate emailed us in June with a question that sums up why Solicitor Accounts makes people nervous. She had sat a mock and hit this scenario: a firm holds £85,000 in its client account for a client whose property purchase has just fallen through. The client rings and says, "Keep hold of it for now — and could you send £12,000 of it to my brother? He's expecting it this week." Four answer options. All of them looked defensible at 11pm the night before an exam.
She picked the one that let the firm pay the brother on the client's written instruction. Wrong. And the reason it was wrong is the single most heavily examined idea in this subject.
Solicitor Accounts is only one of the six FLK2 subjects, but it punches above its weight in the SQE1 exam. The rules are short, the arithmetic is simple, and the examiners know exactly where candidates guess. Let's work through the areas that actually generate marks.
What counts as client money under the SRA Accounts Rules 2019?
Everything in this subject starts with classification. Get the label wrong and every subsequent ledger entry falls over.
Under Rule 2.1, client money is money held or received by the firm which: relates to regulated services delivered to a client; is on behalf of a third party in relation to regulated services (for example, money held as agent or stakeholder); is held as trustee or in a personal capacity arising from a specified office or appointment; or is money received for fees and unpaid disbursements before a bill has been delivered.
That last limb catches most candidates out. Money on account of costs is client money. It sits in the client account until a bill or other written notification of costs is sent. But note the narrow exemption in Rule 2.2: where the only client money a firm holds falls into that fourth category, the firm may keep it in its business account, provided it tells the client in writing where the money will be held and accounts promptly for it.
Exam habit worth building: before you look at the options, write two letters next to the receipt — "C" for client money, "B" for business money. Roughly a third of Solicitor Accounts questions collapse the moment you do this.
Money belonging to the firm — profit costs already billed, a receipt of the firm's own interest, or bank charges — is business money and belongs in the business account. Money paid to reimburse the firm for a disbursement it has already paid out of its own funds is also business money. If the firm has not yet paid the disbursement, the money received for it is client money.
The banking facility trap: the rule SQE1 FLK2 loves to test
Back to that £85,000. Rule 3.3 says a firm must not use a client account to provide banking facilities to clients or third parties, and that payments into, and transfers or withdrawals from, a client account must relate to the delivery by the firm of regulated services.
The client's written instruction does not cure the problem. Nor does the fact that the money genuinely belongs to the client. If there is no underlying legal work — the transaction has collapsed, the retainer is effectively over — the firm cannot simply act as a payment conduit. The correct answer is to return the money to the client, promptly, and let the client pay his brother himself.
This is not a new idea. The Solicitors Disciplinary Tribunal made the point squarely in Wood and Burdett (2004): it is not a proper part of a solicitor's everyday practice to operate a banking facility for third parties. The SRA has repeated the message in its warning notice on improper use of a client account, and the risk is obvious — client accounts used this way become extremely attractive to money launderers.
Watch for these fact patterns in FLK2 questions:
- A client asks the firm to receive funds "for safekeeping" while no matter is live.
- A completed conveyancing file where the client wants residual funds redirected to a person unconnected with the transaction.
- A corporate client wanting the firm to pay its suppliers from the client account.
- Round-sum receipts and immediate onward payments with no legal work in between.
Transfers for costs: when client money turns into business money
Rule 4.3 is the sequencing rule. Where a firm holds client money and intends to use some of it to pay its own costs, it must deliver a bill of costs or other written notification of the costs incurred to the client or paying party before transferring anything out of the client account. The transfer must be for the specific sum identified, and it must be covered by the funds actually held for that particular client.
Once the bill is delivered, the money earmarked for profit costs and VAT ceases to be client money. It should not linger in the client account; the firm transfers it to the business account without delay. The double entry is worth drilling until it is automatic:
Transfer of £1,200 costs plus £240 VAT from client to business account:
Client side — DR client ledger (client account column) £1,440; CR cash sheet (client account) £1,440.
Business side — DR cash sheet (business account) £1,440; CR client ledger (business account column) £1,440, clearing the costs and VAT already posted when the bill was issued.
And the hard limit: Rule 5.3 permits a withdrawal only if sufficient funds are held for that specific client. A client ledger must never show a credit balance being exceeded — in other words, you cannot use client A's money for client B's matter, even for an hour, even by accident. If a question shows a payment that would take an individual client ledger overdrawn, that option is wrong regardless of how sensible it looks commercially.
Interest and residual balances: the tidy-up rules
Rule 7 requires a firm to account to the client or third party for a fair sum of interest on client money held on their behalf. There is no prescribed rate in the rules. Firms operate an interest policy, and the parties may agree a different arrangement in writing, provided the client has been given sufficient information to give informed consent and the terms are fair. A common exam distractor is an answer suggesting the firm must pay the exact interest actually earned on a general client account — it need not; the standard is fairness.
Interest paid to the client out of the firm's own funds is a business account payment debited to the client ledger's business column — it does not come out of other clients' money.
Rule 2.5 deals with residual balances: client money must be returned promptly to the client, or the third party for whom it is held, as soon as there is no longer any proper reason to hold it. Small dormant balances left sitting for years are a classic regulatory failing. If the rightful owner genuinely cannot be traced, the firm may need the SRA's prior written authorisation to withdraw the money (typically by paying it to charity) — that is the "prescribed circumstances" route in Rule 5.1.
Breaches, reconciliations and accountants' reports
Rule 6 imposes a duty to correct breaches promptly on discovery, including replacing any money improperly withdrawn. The word to remember is "promptly" — not "at the next reconciliation", not "when the partner returns from holiday". The firm must replace the shortfall from its own money, and the COFA (compliance officer for finance and administration) carries personal responsibility for compliance and for reporting serious breaches to the SRA.
On record keeping, Rule 8 requires contemporaneous records, client ledgers showing a running balance for each client matter, and a reconciliation of the client account at least every five weeks, signed off by the COFA or a manager. Records must be kept for at least six years.
Accountants' reports under Rule 12 are obtained within six months of the end of the accounting period. They are only delivered to the SRA if qualified. A firm is exempt where all client money held is from the Legal Aid Agency, or where in the accounting period the average client account balance does not exceed £10,000 and the maximum does not exceed £250,000. Learn both figures — questions test them directly.
Two alternatives to holding client money also appear on the specification. A third-party managed account (Rule 9) allows payments to flow through a regulated payment service, provided the firm takes reasonable steps to ensure the client understands the arrangement and the terms. And Rule 11 covers acting as signatory on a client's own account — the firm keeps the records but the money never becomes client money.
How to revise Solicitor Accounts for the SQE1 exam
This subject rewards repetition more than reading. What actually works, in our experience with candidates since the first sitting in 2021:
- Draw a blank two-column client ledger by hand and post ten transactions from memory — receipt on account, disbursement paid, bill delivered, costs transfer, balance returned. Do it until you stop pausing.
- For every question, ask three things in order: is this client money or business money? Is there sufficient credit on this client's ledger? Does the payment relate to regulated services?
- Learn the numbers that are actually numbered: five weeks, six years, six months, £10,000 and £250,000.
- Practise the arithmetic under time pressure. With 180 questions and 5 hours 20 minutes per FLK paper, you have roughly 1 minute 45 seconds each — a Solicitor Accounts question should take less.
- Keep a "trap log": every distractor that fooled you, one line each. Read it the week before the exam.
Solicitor Accounts is one of the few FLK2 subjects where near-perfect scores are realistic. The rules are finite. Treat it as free marks and it will subsidise the subjects where the law is genuinely contestable.
How CELE SQE can help
If ledger entries still feel slippery, our SQE1 courses cover all 13 subjects across FLK1 and FLK2, with worked accounts drills built into every unit — the Long-term Course is £3,720, the Mid-term Course £2,750 and the Short-term Course £1,750, with single-FLK options at half those prices and £150 off for early bird or within-three-months-of-exam bookings. The SQE1 Question Bank subscription (£575 per month) is where most candidates iron out the classification traps described above, and textbooks are available as a full set at £950 or a single FLK set at £570. Questions about which option fits your timeline? Reach us on WeChat SQE100, at [email protected], or through celebar.com — happy to talk it through without any pressure to enrol.