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.
It also explains when client money must be paid into a client account and the limited exceptions to that requirement, what “available on demand” means for client money, how to deal with mixed receipts, and the prohibition on providing banking facilities via client accounts. In addition, it introduces how the Rules govern interest on client money, withdrawals, prompt return of funds, record keeping and reconciliations, oversight responsibilities (including the role of the COFA), and the high-level treatment of joint accounts, a client’s own account, and third‑party managed accounts within the SRA framework.
SQE1 Syllabus
For SQE1, you are required to understand the fundamental principles and rules governing solicitors' accounts, including 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, with a focus on the following syllabus points:
- 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.
- the prohibition on using a client account to provide banking facilities
- the handling of mixed receipts and prompt allocation to the correct account
- prompt return of client money when there is no proper reason to hold it
- “available on demand” requirements and permitted written alternatives
- interest: fair sums, written agreements, and when SDDCAs may be appropriate
- oversight, reconciliations, and the role of the COFA
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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What is the primary objective of the SRA Accounts Rules 2019?
- To maximise profits for law firms.
- To standardise accounting software used by law firms.
- To keep client money safe.
- To detail tax compliance requirements for solicitors.
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Which of the following best describes 'client money' under the SRA Accounts Rules?
- Money belonging solely to the law firm.
- Money held or received by a firm relating to regulated services delivered to a client.
- Personal savings of the firm's partners.
- Fees received after a bill has been delivered to the client.
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Which of the following statements is TRUE regarding the SRA Accounts Rules 2019?
- They apply only to partners in a law firm.
- They permit the use of client accounts for providing general banking facilities.
- They require client money and business money to be kept separate.
- 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.Key Term: Regulated services
Legal and other professional services that a firm is authorised and regulated by the SRA to provide. Client money and the operation of client accounts are governed by the Accounts Rules when connected to such services.
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.
Rule 4.2 addresses mixed receipts (payments that contain both client and business money). Mixed payments may be paid into either the client or business bank account initially, provided the firm promptly allocates and transfers the respective parts to the correct account. In practice, many firms receive mixed payments into the client account and promptly transfer the business money element to the business account, or vice versa, depending on operational systems and bank facilities. Prompt allocation is critical to avoid breaches.
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. Further, Rule 5.3 forbids making withdrawals from the client account for a particular client unless there are sufficient funds held for that client to cover the payment. When sufficient funds are not held, the payment must be made from the firm's business account (or the firm may first advance its own funds into the client account for the client, which then become client money).
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. Rule 2.4 requires that client money be “available on demand” unless the firm has a written agreement with the client or third party for an alternative (for example, a notice period on a deposit account).
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.
Rule 3.1 requires that client accounts be held at a bank or building society in England or Wales. Rule 3.2 requires that the account’s title include the firm’s name and the word “client”, so it is obvious to all (including insolvency practitioners) that it contains money belonging to clients or others. The Rules also require that client money be returned promptly as soon as there is no longer a proper reason to hold it (Rule 2.5). “Proper reason” is linked to the delivery of regulated services; once the service-related need has ended or is delayed significantly, the money should be returned.
Crucially, Rule 3.3 prohibits using a client account to provide banking facilities to clients. Payments into and out of the client account must relate to the delivery of regulated services. Holding a client’s funds merely for convenience, processing payments unrelated to legal work, or acting as a conduit is prohibited.
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.Key Term: Legal Aid Agency (LAA)
A government body that funds legal advice and representation for eligible clients. Payments received from the LAA for a firm’s costs may be treated differently under the Accounts Rules in limited circumstances.
There are limited exceptions to paying client money into a client account. Rule 2.3(b) permits the firm to receive payments from the LAA for the firm’s costs directly into the business account. Rule 2.3(c) permits a written alternative arrangement with the client (or relevant third party) for how funds will be held. Rule 2.3(a) exempts client money held in certain specified roles (for example, as Court of Protection deputy) where other regulatory requirements apply. In addition, a firm that only receives client money on account of its fees and unpaid disbursements, and does not otherwise operate a client account, may, under Rule 2.2, receive those monies outside a client account (typically into the business account), provided clients are told in advance where and how funds will be held. This exception is narrow and must be satisfied strictly.
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). “Fair” is not defined in the Rules; in practice, firms usually adopt a written interest policy that takes account of the amount and time money is held and the rates available on instant-access accounts. Many policies include a de minimis threshold below which no interest is paid (for example, £20), to avoid disproportionate administrative costs.
Key Term: Separate Designated Deposit Client Account (SDDCA)
A deposit account designated for a specific client or matter, used where a firm justifiably holds a significant sum for a longer period. Interest accruing on an SDDCA is paid to that client.
Monies held in a general client account earn interest that typically belongs to the firm, which then pays clients a fair sum in lieu under its policy. Where appropriate, especially for larger long-term balances, a firm may open an SDDCA and pay the client all interest accruing on that designated account. Client money must remain available on demand unless a different written arrangement is agreed (for example, a notice period to secure higher interest).
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 client money has been improperly withheld or withdrawn, it must be replaced immediately, usually from the firm’s business money. Prompt remedial action, coupled with appropriate internal reporting and systems improvement, is essential. The Rules place responsibility for compliance on managers and employees; oversight by the firm’s COFA is central to early identification and remediation of breaches.
Key Term: COFA (Compliance Officer for Finance and Administration)
The individual appointed by an SRA-authorised firm with responsibility for taking reasonable steps to ensure compliance with the SRA Accounts Rules, recording and assessing breaches, and reporting material breaches to the SRA.
Worked Example 1.3
A firm receives a single bank transfer of £750 into its client account comprising: £550 to settle a bill for which a valid invoice has already been delivered, and £200 on account of future disbursements in a new matter. What should the firm do?
Answer:
This is a mixed receipt containing both business money (£550 bill payment) and client money (£200 on account). Under Rule 4.2, the firm must allocate funds promptly to the correct accounts. The £550 should be transferred promptly to the business account (as business money) and the £200 retained in the client account for the new matter.
Worked Example 1.4
A client instructs the firm to use surplus proceeds held in the client account after a sale to pay their monthly apartment rent overseas for convenience until a new purchase completes in several months. There is no related legal work regarding the rental.
Answer:
The firm must refuse. Making payments unrelated to regulated services would breach Rule 3.3 by providing a banking facility. Any surplus funds should be returned to the client promptly under Rule 2.5.
Compliance and Governance
Compliance with the SRA Accounts Rules requires robust systems and clear responsibilities within the firm. A culture of professional scepticism, accurate record keeping, and timely reconciliations is critical to keeping client money safe.
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. Records must be legible and include sufficient narratives. In practice, firms operate a dual system of accounting that clearly distinguishes between business and client money (for example, dual columns on client ledgers and cash books for business and client entries).
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 perform regular reconciliations at least every five weeks (Rule 8.3). Good practice involves a three‑way reconciliation of:
- the balance on the client bank statement(s)
- the cash book or client “cash” account balance
- the total of all client ledger balances
Any discrepancies must be investigated and resolved promptly. Firms must also ensure they obtain at least five‑weekly bank statements for client accounts (Rule 8.2). The firm should maintain a readily accessible central record of all bills or written notifications of costs (Rule 8.4). Sound internal controls include restricted payment authorities, segregation of duties, oversight by the COFA, and contemporaneous documentation of inter‑ledger transfers.
Residual client balances should rarely arise if Rule 2.5 is applied properly. If, after taking reasonable steps, the rightful owner cannot be traced, the SRA permits withdrawals of residual balances under prescribed circumstances without prior authorisation (currently, less than £500 per matter paid to charity with appropriate records), or otherwise with prior SRA authorisation. Accurate records of steps taken to trace the client and of the payment to charity must be retained.
Accountant's Reports (Rule 12)
Most firms holding or receiving client money must obtain an independent accountant's report within six months of the end of their accounting period. The report focuses on risks to client money and compliance with the Rules. Firms that hold only small amounts of client money or only receive LAA payments for costs and do not otherwise operate a client account may be exempt. Only qualified reports (indicating significant breaches or risks) must be delivered to the SRA, reflecting the proportionate oversight model.
A firm’s reporting accountant must be independent and provided with complete information about all accounts held or operated in connection with the practice. Firms should ensure the accountant has prompt access to records and that any issues identified lead to timely remedial action and systems improvements.
Responsibility for Compliance (Rule 1)
Responsibility for compliance rests with the authorised body (firm) and its managers and employees. Managers are jointly and severally responsible for ensuring compliance, including maintaining systems and controls appropriate to the firm’s size, work-type, and volume. In licensed bodies (alternative business structures), the Rules apply to SRA‑regulated activities only; however, the expectation of safeguarding client money remains overarching.
COFAs are central to the control environment. They must take reasonable steps to ensure compliance with the Accounts Rules, maintain records of breaches, identify when a breach or pattern of breaches is material, and report material breaches to the SRA promptly. Regular file and ledger reviews, payment authorisation controls, and monitoring reconciliations are examples of how COFAs can discharge their responsibilities. Regardless of whether a breach involves dishonesty, misuse of client money is treated very seriously; managers may face regulatory action for widespread failures even absent personal knowledge if reasonable oversight was lacking.
Key Term: Third‑party managed account (TPMA)
An account operated by an FCA‑authorised third‑party provider to hold money for clients and others in connection with legal services. When properly used under Rule 11, the firm does not “hold or receive” client money itself.
The SRA framework also recognises other ways that client-related money may be held:
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Joint accounts (Rule 9): Where a solicitor holds money jointly with a client or another party in the course of a matter, most Parts of Rules 2–5 do not apply to that account. However, firms must still obtain five‑weekly statements and keep a central record of bills. The duty to safeguard clients’ money remains.
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Client’s own account (Rule 10): If a solicitor operates a client’s personal bank account as signatory (for example, as attorney or deputy), most Parts of Rules 2–5 do not apply. The solicitor must obtain statements and reconcile at least every five weeks and keep a central record of bills. The duty to safeguard money remains essential.
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TPMAs (Rule 11): Firms may agree in writing to use a TPMA provider where appropriate. Money in a TPMA is not held or received by the firm and falls outside the core client account regime, but firms must still act in the client’s best interests, select an FCA‑authorised provider, explain the arrangement and costs transparently, obtain and check TPMA statements regularly, and notify the SRA that a TPMA provider is being used.
Worked Example 1.5
After completing a conveyancing matter, a firm discovers that £137 remains on the client ledger due to unexpected lender redemption adjustments. Repeated attempts to contact the client have failed for over six months despite letters to the last known address and email. What should the firm do with the balance?
Answer:
Apply Rule 2.5 and the SRA’s residual balance guidance. If reasonable steps to trace the client have failed, the firm may, under the SRA’s prescribed circumstances, pay a balance of less than £500 to charity without prior SRA authorisation, keeping detailed records of the tracing steps and the charity receipt. For larger amounts, prior SRA authorisation is required.
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 in England or Wales, titled with the firm’s name and the word “client”, separate from the firm’s business account.
- Client money must be available on demand unless a different written arrangement is agreed with the client or third party.
- Firms must not provide banking facilities through their client accounts; payments must relate to regulated services.
- Mixed receipts must be allocated promptly to the correct account; business money must not remain in the client account, nor client money in the business account.
- Accurate and up-to-date accounting records must be maintained using double-entry bookkeeping principles, with clear narratives and client-by-client ledgers.
- Client bank accounts must be reconciled at least every five weeks; discrepancies must be investigated and remedied promptly.
- Residual client balances should be avoided; where clients cannot be traced after reasonable steps, limited withdrawals to charity are permitted subject to strict conditions or prior SRA authorisation.
- Firms must account for a fair sum of interest on client money held, unless alternative written arrangements are agreed; SDDCAs may be appropriate for large sums held for longer periods.
- Usually, an independent accountant’s report is required; only qualified reports must be submitted to the SRA.
- Responsibility for compliance lies with the firm, its managers, and employees, with specific oversight from the COFA; misuse of client money is treated as a serious regulatory matter.
- Joint accounts, a client’s own account, and properly used TPMAs sit within the SRA framework with tailored obligations; the overarching duty to safeguard client money persists.
Key Terms and Concepts
- Solicitors Regulation Authority (SRA)
- SRA Accounts Rules 2019
- Regulated services
- Client Money
- Business Money
- Client Account
- Separate Designated Deposit Client Account (SDDCA)
- Third‑party managed account (TPMA)
- Legal Aid Agency (LAA)
- COFA (Compliance Officer for Finance and Administration)
- Double-entry bookkeeping
- Ledger