SRA Rules

1. Application of the Rules

The SRA requires all solicitors to know how to deal with client money held by the solicitor or the firm. Because solicitors are in a position of trust, they must understand the safeguards necessary to protect that money. The SRA Accounts Rules are designed to reduce the risk of accidental or deliberate misuse of client money and to protect clients from the risk of their money being mishandled. This chapter provides an overview of all of those Rules.

2.1 Application

Rule 1 of the SRA Accounts Rules sets out the application of the Rules. Under Rule 1.1, all authorised bodies are bound by the Rules. This includes solicitors' firms and alternative business structures (ABS) / multi-disciplinary practices. Under Rule 1.2, the Rules also bind the managers and employees of authorised bodies.

The Rules therefore cover anyone regulated by the SRA, and the references made throughout to 'you' should be read accordingly. Note that, in relation to a licensed body, the Rules apply only in respect of activities regulated by the SRA in accordance with the terms of that body's licence.

2. Client Money and the Client Account

Rule 2 defines client money; Rule 3 sets out the requirements for a client account; and Rule 4 governs the separation of client money from the firm's money. Together these rules form the core of the Accounts Rules and are the most heavily examined in SQE1 FLK2.

2.2 Definition of Client Money

(a) Money which relates to regulated services delivered to a client.

(b) Money held on behalf of a third party in relation to regulated services delivered by you.

(c) Money held as a trustee or as the holder of a specified office or appointment.

(d) Money held in relation to your fees and any unpaid disbursements if held or received before the delivery of a bill for the same.

All money falling within this definition must be kept separate from money belonging to the firm under Rule 4.1.

2.3 Requirements for the Client Account (Rule 3)

Rule 3.1: a client account must be at a bank or building society in England and Wales.

Rule 3.2: the account name must include the word 'client' to distinguish it from the firm's own business accounts.

Rule 3.3: using a client account to provide banking facilities to clients or third parties is prohibited. Payments into, and transfers or withdrawals out of, a client account must be in respect of the delivery of regulated services.

It is also relevant to note that a bank has no recourse or right against money in a client account in respect of any liability of the solicitor to the bank: s.85(2) Solicitors Act 1974. This statutory protection insulates client money from the firm's own banking liabilities.

2.4 Paying In, Returning and Availability of Client Money

Rule 2.3 requires client money to be paid 'promptly' into a client account. The Rules give no fixed definition of 'promptly'. The SRA deliberately removed the old prescriptive time limit (the previous regime referred to 14 days), so 'promptly' is now judged on the facts of each case; the old 14-day period is no longer a binding rule but remains a useful yardstick. Client money does not have to be paid promptly into a client account in the following circumstances:

Where doing so would conflict with your obligations under a specified office or appointment (Rule 2.3(a)).

Where the client money is received from the Legal Aid Agency for the firm's costs (Rule 2.3(b)).

Where you agree an alternative arrangement in writing with the client, or a third party, for whom the money is held (Rule 2.3(c)).

Rule 2.4 requires client money to be available 'on demand' unless an alternative arrangement is agreed in writing. Rule 2.5 requires client money to be returned promptly to the client (or third party) as soon as there is no longer any proper reason to hold the funds.

2.5 Exception: No Client Account Required (Rule 2.2)

There is an exception to the requirement to maintain a client account under Rule 2.2. A client account is not required where: the only client money held falls within Rule 2.1(d) (i.e. money for fees and unpaid disbursements, and any money for disbursements relating to costs or expenses incurred by you on behalf of the client and for which you are liable); the firm does not for any other reason maintain a client account; and the firm has informed the client in advance of where and how the money will be held.

2.6 Separation of Money (Rule 4)

Rule 4.1 requires client money to be kept separate from money belonging to the authorised body. Rule 4.2 requires you to promptly allocate funds from mixed payments to the correct client account or business account. Rule 4.3 requires a bill before transfer: where you hold client money and some or all of it will be used to pay your costs, you must give a bill or other written notification to the client (or paying party) before transferring the money. Any money transferred must be for the specific sum identified in the bill or notification and must be covered by the amount held for that specific client or third party.

3. Withdrawals from the Client Account

Rule 5 governs when, and how, money may be withdrawn from a client account. This is one of the most frequently examined areas of the Accounts Rules because it requires candidates to apply the rule to a factual scenario.

2.7 When Client Money May Be Withdrawn (Rule 5.1)

The SRA guidance states that Rule 5 permits money to be withdrawn from the client account 'for the purpose for which it is being held'. If the firm has made it clear that the client money in question may be used to reimburse the firm for payments made, it may transfer the money without issuing a bill or other written notification. However, you may not transfer where the firm has not yet incurred or paid the disbursements.

Under Rule 5.1, client money may be withdrawn from the client account:

(a) for the purpose for which it is being held; or

(b) following receipt of instructions from the client (or third party) for whom it is being held; or

(c) on the SRA's prior written authorisation, or in prescribed circumstances.

2.8 Authorisation, Supervision and Sufficiency (Rules 5.2–5.3)

Rule 5.2 requires all withdrawals to be appropriately authorised and supervised. Rule 5.3 provides that you may only withdraw client money if sufficient money is held on behalf of that specific client or third party to make the payment. If more is taken from one client than is held for them, the balance taken represents money held for other clients — a serious breach.

Where there is insufficient client money to make a payment, the payment can be made from the firm's business account. However, money cannot be transferred from the client account to partially reimburse the firm unless a bill is issued or the firm has made the client aware that the money would be used in that manner (SRA guidance, Taking money for your firm's costs).

Under the old rules a specific rule allowed a firm to advance its own money to a client in such cases; the advance then became client money subject to the Rules. There is nothing specific in the current Rules authorising such an advance, but equally nothing appears to prevent a firm from making one.

4. Breaches, Interest, Systems and Controls

This section covers the duty to correct breaches (Rule 6), the requirement to account for interest (Rule 7), and the accounting systems and controls a firm must maintain (Rule 8).

2.9 Duty to Correct Breaches on Discovery (Rule 6)

Rule 6 imposes a duty to correct any breach promptly upon discovery. Any money improperly withheld or withdrawn from a client account must be immediately replaced.

2.10 Interest (Rule 7)

Under Rule 7 there is a requirement to account to clients or third parties for interest. Specifically, Rule 7.1 requires you to account for a fair sum of interest on any client money held on a client's or third party's behalf.

Rule 7.2 allows you to agree otherwise with the client or third party. Any such agreement must be in writing, and the client or third party must be given sufficient information to enable them to give informed consent.

2.11 Client Accounting Systems and Controls (Rule 8)

A client account will contain client money held for many different clients, so firms must maintain records showing, for each client:

all receipts and payments of client money;

all payments made on behalf of the client from the firm's own money; and

bills issued to the client.

Rule 8.1(a) — maintain a client ledger account for each client, identified by the client's name and an appropriate description of the matter.

Rule 8.1(b) — maintain a list of all balances shown by the client ledger accounts of the liabilities to clients and third parties, with a running total of the balances.

Rule 8.1(c) — maintain a separate cash book showing all transactions through the client accounts.

Under Rule 8.2, firms must obtain bank statements for all client accounts and for the firm's own business account at least every five weeks. Under Rule 8.3, firms must prepare bank reconciliation statements for the client accounts at least every five weeks, and any discrepancies revealed must be investigated. Under Rule 8.4, a central record of bills and other written notifications of costs must be kept in a readily accessible form.

Note that firms which do not operate a client account do not need to comply with Rule 8.1(b) and (c), but must still comply with Rule 8.4 (central record of bills).

5. Joint Accounts, Own Accounts and TPMAs

Rules 9 and 10 modify the application of the Accounts Rules to joint accounts and to a client's own account operated by the firm. Rule 11 governs Third Party Managed Accounts (TPMAs) — an increasingly common alternative to operating a traditional client account.

2.12 Joint Accounts (Rule 9)

Rule 9 applies where a firm holds or receives money jointly with a client or a third party. Under Rule 9.1, Rules 2 to 8 do not apply to money so held, except for:

Rule 8.2 — the requirement to obtain bank statements; and

Rule 8.4 — the requirement to keep a readily accessible central record of bills and other notifications of costs.

2.13 Operating a Client's Own Account (Rule 10)

Rule 10 applies where a client authorises the firm to operate an account belonging to the client (e.g. as signatory). Here, Rules 2 to 8 do not apply, except for:

Rule 8.2 — obtain bank statements;

Rule 8.3 — reconcile the account at least every five weeks; and

Rule 8.4 — keep a readily accessible central record of bills and other notifications of costs.

2.14 Third Party Managed Accounts (Rule 11)

Under Rule 11, a firm may enter into arrangements with a client to use a TPMA to receive payments from (or on behalf of) the client, or make payments to (or on behalf of) the client, in respect of regulated services delivered by the firm. A firm may operate a TPMA if:

the use of the account does not result in you receiving or holding the client's money; and

the firm takes reasonable steps, before accepting instructions, to ensure the client is informed of and understands: the terms of the contractual arrangements (in particular how any fees for using the TPMA will be paid and who bears them); and the client's right to terminate the arrangement and to dispute payment requests made by you.

Rule 11.2 requires you to obtain regular statements from the TPMA provider and to ensure these reflect all transactions on the account.

6. Accountants' Reports and Retention of Records

Rule 12 sets out when a firm must obtain an accountant's report (and deliver it to the SRA), and Rule 13 governs the storage and retention of accounting records. The exemptions in Rules 12.2–12.3 are a popular SQE examination point.

2.15 Obtaining and Delivering the Report (Rule 12.1, 12.4)

Under Rule 12.1, a firm must obtain an accountant's report within six months of the end of an accounting period if, at any time during that period, it: (i) held or received client money; or (ii) operated a joint account or a client's own account as signatory.

The report must be delivered to the SRA within six months of the end of the accounting period if it shows a failure to comply with the Rules such that money belonging to clients or third parties is, has been, or is likely to be placed, at risk (a 'qualified' report). Under Rule 12.4, the SRA may require a firm to obtain or deliver a report on reasonable notice where the firm ceases to practise.

2.16 The Accountant and the Report (Rules 12.5–12.9)

Rule 12.5 requires the report to be prepared by a chartered accountant (who is a member of a chartered accountancy body and a registered auditor). Rule 12.9 requires the report to be completed in the prescribed form. Rule 12.8 obliges the firm to provide the accountant with the information needed: details of all accounts held at any bank, building society or other financial institution at any time during the accounting period, and all other information and documentation the accountant requires to complete the report.

Rule 12.6 provides that the SRA may disqualify an accountant from preparing a report if the accountant has been found guilty of professional misconduct or has failed to exercise due care and skill. Rule 12.7 empowers the SRA to specify matters that must be incorporated into the accountant's terms of engagement.

2.17 Exemptions from the Report Requirement (Rules 12.2–12.3)

Rules 12.2 and 12.3 set out exceptions to the requirement to obtain an accountant's report:

Legal Aid only — where all client money held or received is from the Legal Aid Agency; and

Low-balance threshold — where, in the accounting period, the total balance across all client accounts, joint accounts and clients' own accounts does not exceed an average of £10,000 and a maximum of £250,000 (or the equivalent in foreign currency).

2.18 Retention of Records (Rule 13)

Rule 13.1 requires all accounting records to be stored securely and retained for at least six years.

7. Key Notes (Chapter Summary)

The following tables consolidate every rule examined in this chapter. Treat them as a revision checklist — you should be able to state the effect of each rule from memory and apply it to a short scenario.

8. MCQ Practice — Three SQE-Style Questions

Each of the following questions mirrors the style and difficulty of the SQE1 FLK2 single best answer questions on Solicitors Accounts. Attempt each question closed-book, write down your answer, then read the answer key — including why each option is correct or incorrect.

A. Only solicitors.

B. Only solicitors and the managers/partners in the firm.

C. Only managers of authorised bodies.

D. Only ABS multi-disciplinary practices.

E. Authorised bodies, and their managers and employees.

A. This is prohibited because it would amount to providing banking facilities to the client through the client account.

B. This is permitted provided the client gives instructions in writing.

C. This is permitted because the money will be held only for a short time.

D. This is permitted provided the firm accounts to the client for interest.

E. This is permitted provided the firm keeps a central record of the transactions.

A. You may withdraw client money to pay disbursements that the firm has not yet incurred.

B. You may withdraw money to cover most of a payment even if there is insufficient money held for that client to cover the full sum.

C. Rule 5 allows client money to be withdrawn for any purpose the firm considers appropriate.

D. You are never allowed to transfer money to pay the firm's costs without first issuing a bill.

E. Client money may be withdrawn on the SRA's prior written authorisation.

9. Task

Use the following written task to consolidate your understanding of client money before moving on. Aim to write a structured answer of around 300–400 words, citing the relevant rules.

Task. Explain the concept of 'client money' as defined in the SRA Accounts Rules. Illustrate your answer with examples of what constitutes client money, and describe the requirements for handling client money and separating it from the firm's own funds.