Introduction to solicitors' accounts - Understanding the Solicitors Regulation Authority (SRA) framework

Learning Outcomes

This article provides an introduction to the regulatory framework governing solicitors' accounts in England and Wales, specifically the Solicitors Regulation Authority (SRA) Accounts Rules 2019. It outlines the core principles supporting the rules, the distinction between client money and business money, and the fundamental compliance obligations for solicitors and firms. Understanding these foundational concepts is essential for applying the detailed rules covered in subsequent topics and for answering SQE1-style questions correctly.

SQE1 Syllabus

For SQE1, you are required to understand the fundamental principles and rules governing solicitors' accounts. This introductory article focuses on the SRA framework itself and the key concepts necessary for compliance. A thorough knowledge of these principles will support your understanding of more detailed rules relating to specific transactions.

As you work through this article, remember to pay particular attention in your revision to:

  • the purpose and overarching objective of the SRA Accounts Rules 2019
  • the key principles governing the handling of money by regulated firms and individuals
  • the definitions of client money and business money and the requirement to keep them separate
  • the basic concept of a client account
  • the scope of the Rules and who is bound by them.

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.

  1. What is the primary objective of the SRA Accounts Rules 2019?
    1. To maximise profits for law firms.
    2. To standardise accounting software used by law firms.
    3. To keep client money safe.
    4. To detail tax compliance requirements for solicitors.
  2. Which of the following best describes 'client money' under the SRA Accounts Rules?
    1. Money belonging solely to the law firm.
    2. Money held or received by a firm relating to regulated services delivered to a client.
    3. Personal savings of the firm's partners.
    4. Fees received after a bill has been delivered to the client.
  3. Which of the following statements is TRUE regarding the SRA Accounts Rules 2019?
    1. They apply only to partners in a law firm.
    2. They permit the use of client accounts for providing general banking facilities.
    3. They require client money and business money to be kept separate.
    4. They are optional guidelines for best practice.

Introduction

Solicitors and law firms routinely handle money belonging to clients and third parties during legal transactions. Ensuring this money is handled appropriately and kept safe is essential to maintaining public trust and confidence in the legal profession. The Solicitors Regulation Authority (SRA) sets out the mandatory standards for this in the SRA Accounts Rules 2019 ('the Rules'). These Rules form a central part of the regulatory framework for solicitors in England and Wales.

Key Term: Solicitors Regulation Authority (SRA)
The independent regulatory body for solicitors in England and Wales, responsible for setting and enforcing standards of professional conduct, including the Accounts Rules.

Key Term: SRA Accounts Rules 2019
The specific set of rules issued by the SRA that govern how regulated firms and individuals must handle money belonging to clients and others. These rules replaced earlier versions and came into effect in November 2019.

Understanding and complying with the SRA Accounts Rules is not just a regulatory requirement; it is fundamental to ethical practice. Non-compliance can lead to disciplinary action, significant fines, and damage to a firm's reputation. For the SQE1 assessment, a solid understanding of these rules, particularly the core principles and their practical application, is essential. This article focuses on the foundational aspects of the SRA framework.

Core Principles of the SRA Accounts Rules

The SRA Accounts Rules 2019 are supported by several key principles designed to ensure the safety and proper handling of client money. These principles reflect the broader ethical duties outlined in the SRA Principles, such as acting with integrity and protecting client money and assets.

Separation of Funds (Rule 4)

A fundamental principle is the strict separation of client money from money belonging to the firm (business money). Rule 4.1 explicitly requires this separation. This means firms must maintain distinct bank accounts for client funds and their own operational funds.

Key Term: Client Money
Defined in Rule 2.1, this is broadly money held or received by a firm relating to regulated services delivered to a client, money held for third parties in relation to those services (eg, as stakeholder), money held as a trustee, or money held for fees and unpaid disbursements before a bill is delivered.

Key Term: Business Money
Money belonging to the firm itself, such as money earned from fees after a bill has been delivered, or money to cover the firm's own operational expenses. This must not be mixed with client money.

This separation prevents the accidental use of client funds for business expenses and protects client money in case of the firm's insolvency.

Use of Client Money (Rule 5)

Client money must only be used for the purpose for which it is being held (Rule 5.1(a)) or following specific instructions from the client or third party for whom the money is held (Rule 5.1(b)). Firms cannot use one client's money for another client's matter or for the firm's own purposes.

Worked Example 1.1

A firm holds £5,000 in its client account for Client A, relating to a property purchase. The firm needs to pay a court fee of £150 for Client B, but holds no funds for Client B. Can the firm use £150 from Client A's money to pay Client B's court fee, intending to replace it later?

Answer: No. Rule 5.3 prohibits withdrawing client money unless sufficient funds are held for that specific client. Using Client A's money for Client B's matter is a breach of the Rules, even if the firm intends to replace it. The payment for Client B must be made from the firm's business money.

Safeguarding Client Money (Rule 2 & 3)

Firms have a duty to safeguard client money. This includes the requirement under Rule 2.3 to pay client money promptly into a client account unless specific exceptions apply.

Key Term: Client Account
A bank or building society account held by the firm, in the firm's name but including the word 'client', specifically for holding client money (Rule 3). It must be located in England or Wales.

Furthermore, Rule 2.5 requires that client money is returned promptly to the client or rightful owner as soon as there is no longer a proper reason to hold it. Rule 3.3 also explicitly prohibits using a client account to provide banking facilities.

Worked Example 1.2

A firm completes a litigation matter for a client and receives settlement funds of £10,000. After deducting its billed costs, £8,000 remains due to the client. The client asks the firm to hold the £8,000 for a few months as they are undecided about how to invest it and find it convenient for the firm to keep it safe. Should the firm agree?

Answer: No. Rule 2.5 requires client money to be returned promptly when there is no longer a proper reason (related to the legal services) to hold it. Furthermore, holding the money simply for the client's convenience could breach Rule 3.3 (prohibition on providing banking facilities). The firm should return the £8,000 to the client promptly.

Interest on Client Money (Rule 7)

Firms must account to clients for a fair sum of interest on client money held (Rule 7.1), unless a different arrangement is agreed in writing after providing sufficient information (Rule 7.2). Firms must have a written policy on interest calculation.

Duty to Rectify Breaches (Rule 6)

If a firm breaches the Accounts Rules, Rule 6.1 requires the breach to be corrected promptly upon discovery. If the breach involves client money being improperly withheld or withdrawn, it must be remedied immediately, which usually involves replacing the funds from the firm's own business money.

Compliance and Governance

Compliance with the SRA Accounts Rules requires robust systems and clear responsibilities within the firm.

Accounting Records and Systems (Rule 8)

Rule 8 mandates that firms keep accurate, contemporaneous, and chronological accounting records of all dealings with client money and business money related to client matters. This involves using double-entry bookkeeping principles and maintaining separate ledgers for each client and matter.

Key Term: Double-entry bookkeeping
An accounting system where every financial transaction is recorded with two corresponding and opposite entries – a debit (DR) in one account and a credit (CR) in another account. This ensures the accounts balance.

Key Term: Ledger
A book or electronic record containing specific accounts. Firms maintain client ledgers (tracking money held for/owed to specific clients) and cash accounts (tracking movements in bank accounts), often separating client and business transactions within these.

Firms must also perform regular reconciliations (at least every five weeks) between their bank statements and their internal accounting records (Rule 8.3).

Accountant's Reports (Rule 12)

Most firms holding client money must obtain an independent accountant's report within six months of their accounting period end (Rule 12.1). This report verifies compliance with the Rules. Exemptions exist, for example, for firms holding only Legal Aid Agency money or very small amounts of client money (Rule 12.2). Qualified reports (indicating significant breaches or risks) must be submitted to the SRA.

Responsibility for Compliance (Rule 1)

Responsibility for compliance rests with the firm itself and its managers (partners, directors, members) and employees (Rule 1.1). Managers are jointly and severally responsible for ensuring the firm complies with the Rules (Rule 1.2). Firms must also appoint a Compliance Officer for Finance and Administration (COFA) who has specific responsibilities for monitoring and ensuring compliance.

Key Point Checklist

This article has covered the following key knowledge points:

  • The SRA Accounts Rules 2019 aim primarily to keep client money safe.
  • Key principles include separating client and business money, using client money only for its proper purpose, promptly paying in and returning client money, and accounting for interest.
  • Client money must generally be held in a designated client account, separate from the firm’s business account.
  • Firms must not provide banking facilities through their client accounts.
  • Accurate and up-to-date accounting records must be maintained using double-entry bookkeeping principles.
  • Regular reconciliations and, usually, an annual accountant’s report are required for compliance monitoring.
  • Breaches of the Rules must be rectified promptly, especially if client money is affected.
  • Responsibility for compliance lies with the firm, its managers, and employees, with specific oversight from the COFA.

Key Terms and Concepts

  • Solicitors Regulation Authority (SRA)
  • SRA Accounts Rules 2019
  • Client Money
  • Business Money
  • Client Account
  • Double-entry bookkeeping
  • Ledger
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

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Senior Associate at Trilegal