Client Money and Business Money

Introduction

This chapter explains the single most important distinction in the **SRA Accounts Rules** (in force from 25 November 2019): the difference between **client money** and **business money**. Almost every accounts question in SQE1 FLK2 turns on correctly classifying a receipt or payment as one or the other, and then knowing **which bank account** it must pass through. The chapter defines **client money** (Rule 2.1), explains the **requirement to hold it in a client account** and the **narrow exemption** in Rule 2.2, and works through the rules on **paying in, withdrawing, repaying and recording** client money, the **prohibition on providing banking facilities**, and the **reconciliation** obligations.

Assessment focus

For SQE1 FLK2 you must be able to **apply** the SRA Accounts Rules to a realistic firm scenario, not merely recite the definition of client money. Expect single best answer questions (SBAQs) that ask you to **classify a receipt** (client money or business money), decide **which bank account** it should be paid into, identify **whether and when** money may be withdrawn from the client account, and recognise breaches such as paying out more than is held for a client (Rule 5.3) or using the client account as a **banking facility**. This is a closed-book assessment: memorise the Rule numbers, the **five-week** reconciliation and statement cycle, the **six-year** retention period, and the conditions for the Rule 2.2 exemption.

Study tips

1) Master the **Rule 2.1 limbs** of client money: (a) relating to regulated services, (b) held on behalf of a third party, (c) held as trustee / officeholder, (d) the firm's fees and unpaid disbursements held before a bill is delivered. 2) Remember the **reimbursement trap**: money received from a client for a disbursement the firm has **already paid** is **business money**, not client money. 3) Learn the **Rule 2.2 exemption** (the four cumulative conditions for not operating a client account) and the reduced record-keeping that follows. 4) Fix the numbers: client money must be paid in **promptly** (Rule 2.3), returned **promptly** (Rule 2.5), available **on demand** (Rule 2.4); statements and reconciliations **at least every five weeks** (Rules 8.2-8.3); records kept **six years** (Rule 8.4). 5) Never forget Rule 5.3: you may **never** pay out more from the client account than is held for that specific client — top up from business money first.