Notes on Solicitors' Accounts for those preparing for the SQE. I have passed the LPC with a distinction and I am now preparing to take the SQE. Having looked at the exam content and my existing LPC notes, I have created a new set of notes containing all the knowledge you will need from this module...
Exam: Errors relating to the Rules will be penalised more than other For (a): firm must set up a separate client account for the money so it is
types of errors. Permitted: basic calculator kept separate from office money and money belonging to other clients.
For (b): represent the law firm’s costs so it is logical for those not to be
SOLICITORS’ ACCOUNT RULES treated as client money.
Rule 1.1 These rules apply to all authorized bodies, i.e. law firms The money under (c) will have to be held in accordance with the
SRA’s overarching objective is to keep client money safe. alternative agreement made with client or third party. A record will need
Rule 4.1 client money must be kept separate from office money. to be kept of the terms of that agreement.
Preamble to SRA Account Rules Firms must have systems and controls
in place to ensure compliance with the rules. Note that money can be received which relate to client but not to the
Rule 6.1 Breaches of the Rules must be corrected promptly on discovery. work the firm has done, or is doing, for client. If, for example, a cheque
made payable to client is received from a third party to forward on to
client, it is good practice to make a note in that client’s ledger recording
CLIENT MONEY: both the receipt of and the handing over of the cheque.
What is client money? When can you pay money out of client account?
Rule 2.1 Client money = money held or received by the firm. It belongs Rule 3.3 All payments into, transfers from; or withdrawals from a client
to the client. account must be in respect of the delivery by solicitor / law firm of
regulated services.
Client money if:
(a) Money received from client on account of costs. Client money may only be withdrawn from client account if:
• Money from client sent for general purposes in 1. it is for the purpose for which it is being held – eg. paying court
connection with a matter. fees.
• This is money which has been transferred to cover not
yet incurred expenses. OR
Eg. if a solicitor has been instructed in connection with a
property purchase, solicitor will ask client for money to 2. it is following receipt of instructions from client, or third party
cover the Land Registry fees. If client doesn’t go ahead from whom the money is held – eg. you have been holding the
with the purchase and the searches are not then paid for, money for the deposit for the purchase of a property
the money remains client money.
OR
(b) Money received in respect of your fees or yet unpaid
disbursements expenses. 3. it is on the SRA’s prior written authorisation or in prescribed
• Costs = fees and disbursements. circumstances. The only prescribed circumstance which exists at
• Fees = a firm’s own charges or profit costs (including any the moment is to withdraw residual client account balances of
VAT element). less than £500 on any one client matter provided the balance is
• Disbursements = costs paid to third parties by solicitors paid to a charity of the law firm’s choice AND the law firm has
on behalf of their client (including VAT). Office expenses met the conditions set out.
such as postage fees are not included. Includes: Stamp
Duty Land Tax, Land Registry fees, company search fees OR
and court fees.
4. Client money becoming office money in order to satisfy bill of
(c) Money received from client but belonging to a third party: costs: The money can be transferred after the firm delivers a bill
money held as agent, stakeholder or held to the sender’s order. of costs / other written notification of costs to client. Any
eg. the deposit for a purchase. payment taken from client account must only be for the specific
(d) Money held as a trustee or as the holder of a specified office or sum identified in the bill of costs / written notification. Further,
appointment, such as donee of a power of attorney, Court of the payment must be covered by the amount held for the
Protection deputy or trustee of occupational pension scheme. particular client / third party.
Where should client money be placed? OR
Rule 3.2 Client account = account at a bank or building society in England 5. Mixed payments: when the office money element of a mixed
and Wales; the name of client account has to include the name of the payment which has to be transferred to the office account.
law firm and have the word “client”. It is NOT a bank account belonging
to client. Only withdraw if sufficient funds are held on behalf of that specific
client or third party to make the payment.
Ledger = an accounting tool we use to record money coming in an going
out and this helps us identify to whom the money belongs. A ledger is OFFICE MONEY:
not usually a real bank account.
What is office money?
The ledger relating to client account is referred to as ‘client cash’.
Client ledgers are logical: ££ into ledger = CR, out = DR Office money = money belonging to authorised bodies
A law firm will have a general client account holding the money of Office money if:
various clients. However, it can open up separate designated client • Rule 2.1(d) Paid disbursements – eg. if law firm held no money
accounts holding each client’s money. The total amount ‘owed’ by a law for client so had to pay for disbursement and client later sends
firm to all its clients should equal the money held in client account(s). money but only after disbursements are paid by the law firm.
If the firm has already paid for costs / expenses it can pay any
The names of these accounts must include both the name of the law firm money it receives from client to reimburse the firm for these
AND the word ‘client’. costs into the office account without having to issue a bill to
Client money to be paid promptly into a client account so once you client.
received and identified it as client money, it must be paid into client • Rule 2.1(d) Money sent after a bill for the law firm’s fees is
account. delivered: Client pays solicitor for work undertaken.
Exceptions:
(a) Money held as a trustee of the holder of a specified • Money sent by client after bill of unpaid costs or expenses is
appointment, eg. a donee of a power of attorney, Court of delivered: this is done to reimburse costs or expenses not yet
Protection deputy or trustee of an occupational pension paid by the firm.
scheme does not have to be paid into a client account if doing
so would conflict with the obligations under rules or regulations Where should office money be placed?
relating to the specified office or appointment. Office account = physical bank account used by a law firm to hold office
(b) Client money represents payments from the Legal Aid Agency for money. Note, the Rules may use the word “business account”.
your costs (= fees + disbursements) (‘fees’ meaning your own
charges/profit costs including VAT) does not have to be paid into The ledger relating to the office account is ‘office cash’.
client account. Any money on the office account belongs to the firm.
(c) You agree in a written alternative arrangement with the person
for whom the money is held not to hold the money in client General rule: office money should be paid into the office account.
account.
Solicitors’ Accounts – SQE notes | Page 1 of 14
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, When can you pay office money into client account? • Who will be responsible for costs associated with the agreement
• That the TPMA is regulated by the FCA and that complaints about
A firm may allocate funds from mixed payments to the correct client the TPMA provider should be made to that provider in
account or office account. accordance with their complaints procedure
• That the regulatory protections that apply to TPMAs are
Clients often send or transfer e.g. money needed to pay a bill for work different to those that apply to client money held in a firm’s
done but also to include some money for another matter. client account.
• If the money is transferred by client to the office account, or the You must have in place effective governance structures, arrangements,
firm pays a cheque made payable to the firm’s office account systems and controls to ensure your business and employees comply
into the office account, the firm must ‘promptly’ allocate client with our regulatory arrangements.
money element into client account.
• If client transfers a mixed payment to client account, or client
only sends one cheque made payable to the firm’s client account,
the firm must promptly allocate the office money element to the
office account – again leaving office money in with client money
for a short while. The law firm is not in breach of Rule 4.1 if it
pays office money into client account (and vice versa) this way.
OTHER RULES:
Solicitors must keep accounting records for client money: law firms
must obtain bank or building society statements min. every five weeks
and must carry out reconciliations between the bank statements and the
firm’s own records.
A law firm must “keep readily accessible a central record of all bills or
other written notification of costs given by you”.
Accountants’ Reports:
The preparation and delivery to the SRA of an accountant’s report:
• Firms have to obtain an independent accountant’s report.
• If a law firm has not carried out client account bank
reconciliations, this is likely to lead to the accountant having to
submit a qualified report.
• There is a prescribed form for the accountant to use to prepare
their report on a law firm.
Record-keeping: Firms must retain all “accounting records” for at least
6 years but client’s instructions in relation to holding client money must
only be retained if they don’t comply with the Rules.
Joint accounts:
Joint accounts are not client accounts, but money held in a joint account
will still be client money.
The nature of a joint account means that it cannot be a client account as
the account would not be in the sole name of the solicitor or the firm.
Having a joint account allows you and another person to operate and
manage the account and the money in it. Joint accounts might be
operated by you with the client, another law firm or a third party.
Those named on the joint account will have equal access to the account.
The risks to a client’s money could, therefore, be higher.
Relevant rules:
• You must make sure that you safeguard money and assets
entrusted to you by clients and others.
• Obtain, at least every 5 weeks, statements from banks, building
societies and other financial institutions for all joint accounts
held or operated by you.
• Keep readily accessible a central record of all bills or other
written notifications of costs given by you.
Third-party managed accounts (TPMA):
These can be used as an alternative to client accounts.
Money held in a TPMA does not fall under the definition of client money.
Make sure that the TPMA provider is regulated by the Financial
Conduct Authority.
The TPMA provider must be:
• An authorised payment institution
• A small payment institution which has adopted voluntary
safeguarding arrangements to the same level as an authorised
payment institution
OR
• An EEA authorised payment institution.
Make sure that you have taken reasonable steps to ensure that the client
understands the arrangement, before the agreement is entered into.
They should understand:
• How their money will be held and how the transaction will work.
• Their right to terminate the agreement
• Their right to dispute payment requests made by you
Solicitors’ Accounts – SQE notes | Page 2 of 14
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