Learning Outcomes
This article explains the meaning and designation of client accounts under the SRA Accounts Rules, including:
- Definitions of client money and business money
- The concept and purpose of a client account
- Mandatory naming and designation requirements
- General client accounts and separate designated client accounts (including separate designated deposit accounts)
- Availability on demand, written alternative arrangements, and prompt return of client money
- Circumstances permitting operation without a client account and the use of third-party managed accounts (TPMAs)
- Prohibition on using client accounts to provide banking facilities
- Regulatory and insolvency implications of misdesignation and misuse, and the role of systems, reconciliations, and COFA oversight
SQE1 Syllabus
For SQE1, you are required to understand how solicitors must handle client money, including the definitions of client money and client accounts, the rules governing their designation, and the practical implications to ensure client money is kept safe and separate from the firm’s funds, with a focus on the following syllabus points:
- the definition of client money and business money under the SRA Accounts Rules
- the meaning and purpose of a client account
- the mandatory requirements for naming client accounts
- distinguishing between general client accounts and separate designated client accounts
- the requirement that client money is available on demand unless a written alternative arrangement is agreed (Rule 2.4)
- when client money may be withheld from a client account, including Legal Aid Agency payments and written alternative arrangements (Rule 2.3)
- the prohibition on using a client account to provide banking facilities (Rule 3.3) and its practical indicators
- the record-keeping and reconciliation controls that support proper designation and separation (Rule 8).
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which SRA Accounts Rule requires client money to be kept separate from money belonging to the firm?
- Rule 2.1
- Rule 3.3
- Rule 4.1
- Rule 5.1
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A solicitor receives money from a client specifically to pay stamp duty land tax on a property purchase. Is this money client money or business money?
- Business money, because the firm will pay HMRC.
- Client money, because it relates to regulated services delivered to a client.
- Business money, as it is for a disbursement.
- Client money only if a bill has not yet been issued.
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What information MUST be included in the name of a client bank account according to SRA Accounts Rule 3.2? (Select all that apply)
- The name of the client
- The word "Client"
- The name of the authorised body (firm)
- The matter reference number
Introduction
Handling client money is a core responsibility for solicitors and is heavily regulated to protect the public and maintain trust in the profession. The SRA Accounts Rules (the Rules) set out strict requirements for managing funds that do not belong to the firm. A fundamental aspect of these rules is the correct identification and designation of client accounts. Understanding the meaning of a client account and how it must be designated is essential for compliance and forms part of the foundational knowledge assessed in SQE1.
A correctly designated client account does more than meet a naming standard; it creates a clear legal and operational boundary between money belonging to clients and money belonging to the firm. That boundary is central to the separation principle in Rule 4.1 and underpins risk management, audits, reconciliations and regulatory oversight. Clear designation also assists in insolvency contexts: where an account is properly titled as a client account, it signals that the monies are not the firm’s assets and should not be available to the firm’s creditors.
This article focuses on the definitions provided by the Rules and the specific requirements for naming client accounts, distinguishing them clearly from the firm's own business accounts. It also highlights how separate designated accounts may be used, and the consequences of misusing client accounts, including the prohibition on acting as a banking facility.
Client Money vs Business Money
Before understanding client accounts, it is essential to differentiate between client money and business money. The Rules mandate that these two types of money must be kept separate (Rule 4.1).
Key Term: client money
Money held or received by a firm relating to regulated services delivered to a client; or on behalf of a third party in relation to regulated services; or as a trustee or holder of a specified office or appointment; or in respect of fees and unpaid disbursements received prior to delivery of a bill (Rule 2.1).Key Term: business money
Money belonging to the authorised body (the firm) itself. This includes money received for billed fees, reimbursement for disbursements already paid by the firm, and funds for the general running of the firm.
The core distinction is functional:
- Money on account of the firm’s fees and unpaid disbursements, received before a bill is delivered, is client money and must be paid promptly into a client account (Rule 2.3).
- Money received to reimburse a disbursement already paid by the firm (for example, a Land Registry fee the firm has already met from its business account) is business money and belongs in the business account.
- Some payments from the Legal Aid Agency (LAA), where they cover the firm’s costs, may be received into the business account under Rule 2.3(b).
Key Term: regulated services
Legal and other professional services provided by the firm that are regulated by the SRA, including acting as a trustee or the holder of a specified office or appointment.
The distinction matters because correct placement in the appropriate account (client vs business) is itself part of compliance. Misplacement affects reconciliations, reporting, and the firm’s ability to demonstrate that client money is safeguarded.
Worked Example 1.1
A client pays £600 “on account of costs and disbursements” at the start of a probate matter. Two weeks later, the firm pays a £90 court fee from its business account and asks the client to reimburse that fee.
Answer:
The £600 received initially is client money and must be paid into the client account until a bill is delivered. The £90 reimbursement of a disbursement already paid by the firm is business money and should be received into the business account.
What is a Client Account?
A client account is a specific type of bank or building society account used solely for holding client money. It acts as a safeguard, ensuring that client funds are segregated from the firm's operational finances.
Key Term: client account
A bank or building society account held by a firm to hold client money, maintained in compliance with the SRA Accounts Rules.
Rule 3.1 requires that client accounts must be held at a bank or building society branch located in England and Wales. In practice, firms will often operate both a general client account (current account) for day-to-day client money movements and, where justified, separate designated deposit client accounts for holding substantial sums for a specific client or trust.
The Rules also require client money to be available on demand unless a different arrangement is agreed in writing (Rule 2.4). This is critical to the meaning of a client account: its purpose is to hold client money in a form that is readily accessible to meet client instructions, settle disbursements, or return money promptly when it is no longer needed.
Key Term: Compliance Officer for Finance and Administration (COFA)
The person responsible in the firm for ensuring compliance with the SRA Accounts Rules, including oversight of reconciliations, systems and controls for client money.
Purpose of a Client Account
The primary purposes of maintaining a distinct client account are:
- Safeguarding: To protect client funds from the firm's creditors in case of insolvency. Designation of the account as a “Client Account” supports recognition that the funds are held to the order of clients, not the firm.
- Transparency: To provide a clear audit trail of all transactions involving client money. This transparency is supported by Rule 8 requirements to keep accurate, contemporaneous and chronological records and to reconcile at least every five weeks.
- Compliance: To meet strict regulatory requirements for separation, availability on demand, and to avoid misuse of client accounts for non-legal transactions.
Designation of Client Accounts
Clear and accurate naming (designation) of client accounts is mandatory under the Rules. This ensures that the nature of the account is immediately apparent to the bank, the firm, the SRA, and any other relevant parties (like an insolvency practitioner). Appropriate designation reduces the risk of confusion, improper withdrawals, or a client account being treated as part of the firm’s assets.
Rule 3.2 states that the name of any client account MUST include:
- The name of the authorised body (the firm).
- The word ‘client’.
Including “client” in the title makes the status of the funds unmistakable. It also aligns with the principle that where an account is clearly a client account, it should not be subject to set-off for the firm’s liabilities and strengthens the position that the money is not the firm’s property.
Exam Warning
The inclusion of the word 'client' in the account title is non-negotiable. An abbreviation like 'clt' is not sufficient. Failure to correctly designate the account can lead to breaches of the Rules and potential confusion regarding the status of the funds held.
Types of Client Accounts and Designation
While the basic designation requirements apply universally, the specifics can vary depending on the type of client account used:
General Client Account
Most firms operate a general client account where money for various clients is pooled. This account must comply with the basic designation requirements.
Key Term: general client account
A type of client account holding client money for multiple clients or matters, requiring careful ledger management to track individual client balances.
General client accounts are typically instant-access current accounts to meet the “available on demand” requirement (Rule 2.4). Firms must maintain individual client ledgers to track each client’s balance and reconcile the total of all client ledger balances to the bank statement and cash book at least every five weeks (Rule 8).
Example Designation: "ABC Solicitors Client Account"
Separate Designated Client Account (SDCA)
For specific circumstances, such as holding large sums or funds for an extended period for a particular client or trust, a firm might open an SDCA. These accounts offer clearer segregation and may be operated as deposit accounts that earn interest for that client.
Key Term: separate designated client account
A type of client account opened for money relating to a single client, other person, or trust, which includes specific reference to that client, person, or trust in its title, in addition to the firm's name and the word 'client'.Key Term: separate designated deposit client account (SDDCA)
A separate designated client account held on deposit for one client or trust, typically used to hold substantial sums for longer periods or where paying all deposit interest to the client is appropriate. Withdrawals may require a transfer back into the general client account before payment is made.
Although the 2019 Rules do not prescribe the inclusion of the client’s name in an SDCA title beyond Rule 3.2, best practice is to add a clear reference to the specific client/matter to avoid ambiguity and to evidence segregation.
Example Designation: "ABC Solicitors Client Account - Jones Property Matter" or "ABC Solicitors Client Deposit Account - Smith Trust"
Worked Example 1.2
A firm, 'Legal Eagles LLP', receives a £50,000 deposit from a client, Mrs. Davies, for a property purchase. The firm decides to hold this in its main client account used for all clients. How should this account be named to comply with Rule 3.2?
Answer:
The account must include the firm's name and the word 'client'. A compliant name would be "Legal Eagles LLP Client Account". It does not need to include Mrs. Davies' name as it is a general client account.
Worked Example 1.3
'City Law Associates' holds £1 million in trust funds for the 'XYZ Charitable Trust'. They decide to open a dedicated deposit account for these funds to potentially earn more interest. How should this account be designated?
Answer:
As this is an account for a specific trust, it should be designated to reflect this. A compliant name would be "City Law Associates Client Account - XYZ Charitable Trust". This clearly identifies the firm, the nature of the account ('Client'), and the specific trust involved.
Worked Example 1.4
A firm receives £250,000 to hold for six months pending probate distributions and agrees in writing with the personal representatives to hold the money on deposit to earn interest. What designation and arrangement are compliant?
Answer:
The firm should open a separate designated deposit client account named to include the firm’s name and the word ‘Client’, and ideally the estate identifier (for clarity), for example: “Hamilton & Co Client Deposit Account – Estate of M Patel”. The written agreement satisfies Rule 2.4’s exception to “available on demand” where notice or term conditions apply.
Other ways client money may be held
In limited circumstances, client money may be managed without the firm operating its own client account:
- Rule 2.2 exception: If the only client money a firm receives is on account of its fees and unpaid disbursements, and the firm does not operate a client account for any other purpose, the firm may receive such money into the business account, provided clients are told in advance where and how their money will be held.
- Third-Party Managed Accounts (TPMAs): A firm may agree with clients to hold money in a TPMA operated by an FCA-regulated provider (Rule 11). In that case, the money is not held in the firm’s client account, but the firm retains duties to act in clients’ best interests and to ensure the TPMA arrangements safeguard funds and are transparently explained.
Key Term: third-party managed account (TPMA)
An account operated by an FCA-regulated third party to hold money for clients, used under Rule 11 where a firm agrees in writing with the client to use such an arrangement instead of operating a client account.
Worked Example 1.5
A sole practice undertakes only LAA-funded criminal defence work and does not hold completion monies or client deposits for other matters. Can it operate without a client account?
Answer:
Yes, if the only client money received is payments for the firm’s costs from the Legal Aid Agency, Rule 2.3(b) allows such sums to be paid into the business account. If the firm does not receive other categories of client money, it may operate without a client account under Rule 2.2, provided clients are told in advance where and how their money will be held.
Prohibition on Providing Banking Facilities
Rule 3.3 strictly prohibits firms from using a client account to provide banking facilities. Payments into and withdrawals from a client account must be linked to the delivery of regulated legal services or a related transaction the firm is handling. Holding client money without a clear connection to ongoing legal work, or making payments unrelated to the retainer, breaches this rule.
The prohibition exists to prevent misuse of a regulated legal account as a substitute for commercial banking, and to mitigate risks of money laundering, evasion of insolvency processes, or concealment of assets. Warning signs that a client account is being used as a banking facility include:
- Regular in-and-out flows with little or no associated legal work;
- Holding sale proceeds long after completion without a proper reason, followed by payments to third parties on client request;
- Acting as “escrow only” without advising on the legal transaction;
- Processing personal bill payments (utilities, school fees, car deposits) unconnected to a matter the firm is handling.
Revision Tip
Remember the core purpose: client accounts are for holding money necessary for legal services, not for general banking convenience. If a client asks you to hold funds indefinitely or make payments unrelated to your legal work (like paying personal bills), this likely breaches Rule 3.3.
Worked Example 1.6
A firm completes a property sale and receives net proceeds. The client instructs the firm to retain the proceeds in the client account and pay monthly school fees of £2,000 for the next year.
Answer:
This breaches Rule 3.3. There is no sufficient link between paying school fees and a legal transaction the firm is handling. The firm should return proceeds promptly and refuse to make unrelated payments.
Availability on demand and returning money
Two further principles shape how client accounts operate:
- Availability on demand (Rule 2.4): Client money must be available immediately unless an alternative arrangement (e.g., deposit account with notice) is agreed in writing with the client or third party.
- Returning client money promptly (Rule 2.5): When there is no longer a proper reason for holding client money (for example, at the end of a matter), it must be returned promptly. Long-retained balances increase regulatory risk and may require specific action (for small residual balances, withdrawal to charity may be authorised under prescribed conditions; larger balances require SRA authorisation).
Worked Compliance Examples
Worked Example 1.7
A firm opens an account titled “Riverview Law Office Account” and uses it to hold completion monies for conveyancing matters. Is this compliant?
Answer:
No. Client money must be held in an account that includes the firm’s name and the word “Client” per Rule 3.2. “Office Account” is a business account designation and cannot be used for client money.
Worked Example 1.8
A firm plans to open multiple accounts: “Brighton Legal Client Account” (current) and “Brighton Legal Client Deposit Account – Jenkins Trust”. Is further wording needed?
Answer:
The names include the firm’s name and the word “Client” as required by Rule 3.2. Adding “Deposit” and the specific client/trust reference is best practice for clarity and segregation.
Worked Example 1.9
A client asks the firm to hold completion monies for two weeks in a deposit account with 30 days’ notice because the rate is higher, and agrees in writing to the notice period. Can the firm accept?
Answer:
Yes. Rule 2.4 allows an alternative arrangement by written agreement. The firm should explain the notice implication and hold the funds in a separate designated deposit client account with clear designation.
Key Point Checklist
This article has covered the following key knowledge points:
- Client money must be kept separate from the firm's own business money (Rule 4.1).
- A client account is a specific bank or building society account in England and Wales used solely for holding client money (Rule 3.1).
- The name of any client account must include the name of the firm and the word 'client' (Rule 3.2).
- General client accounts hold pooled funds for multiple clients and must be instant access unless written alternative arrangements are agreed (Rule 2.4).
- Separate designated client accounts (including separate designated deposit client accounts) hold funds for a single client or matter and should ideally reference this in the account title for clarity.
- Firms may, in limited circumstances, operate without a client account (Rule 2.2) or use a TPMA (Rule 11) where agreed in writing and properly safeguarded.
- Using a client account to provide general banking facilities is prohibited (Rule 3.3).
- Proper systems and controls, including periodic reconciliation and COFA oversight, support designation and separation (Rule 8).
- Client money must be returned promptly when there is no proper reason to hold it (Rule 2.5).
Key Terms and Concepts
- client money
- business money
- regulated services
- client account
- general client account
- separate designated client account
- separate designated deposit client account (SDDCA)
- Compliance Officer for Finance and Administration (COFA)
- third-party managed account (TPMA)