Solicitors Accounts: SRA Account Rules (SQE1 only)

Question 1

What must solicitors do where client money is lost or taken?

Answer 1

You/firm must report this breach to them promptly even where you/firm has already replaced the money

Question 2

What do the SRA Accounts Rules do and to whom do they apply?

Answer 2

• Regulate how money is handled by solicitors and imposes stringent penalties for breaches of rules however innocent
• Apply to authorised bodies (bodies authorised by SRA) and managers (sole principal, members, directors, partners)

Question 3

Who is responsible for SRA Account Rules and how?

Answer 3

Managers are jointly and severally liable for compliance with the rules i.e. share responsibility equally

Question 4

When must authorised bodies who hold/receive client money obtain an accountant’s report?

Hold/receive or operate joint account or client account as signatory

Answer 4

Within 6 months of end of accounting period to which report relates

If it has not held client money = not required to obtain report

Question 5

Should an accountant’s report be delivered to the SRA?

Answer 5

Only if it is qualified i.e. shows a failure to comply with SRA Account Rules so client’s money is likely to be at risk

Question 6

Will all breaches of the Accounts Rules make a report qualified (and thus need to be delivered)?

Answer 6

• Only where there has been a significant breach so money is placed at risk e.g. significant and/or unreplaced shortfall, actual or suspended fraud or dishonesty, accounting records unavailable, improperly used as banking facility
• Administrative errors - unless they are persistent or derive from lack of controls - will not be significant
• Minor breaches are expected, but should not all be notified

Question 7

When can the SRA require an authorised body to obtain/deliver accountant’s report on reasonable notice?

Answer 7

If authorised body has ceased to operate as an authorised body and to hold/operate client account (final report) or the SRA considers it within the public interest to do so

Question 8

What are the 2 exemptions from requirement to obtain an accountant’s report?

Answer 8

1. Where all of money held/received during accounting period is from Legal Aid Agency
2. Where average balance on client account(s) does not exceed £10,000 and maximum balance does not exceed £250,000

Can both still be required to provide final report/public interest

Exceptions only apply to that accounting year

Question 9

What are the accountant requirements for the accountant’s report?

Answer 9

Accountant needs to be a member of a chartered accountancy body and work for or be a registered auditor

Question 10

What can the SRA do re accountants’ reports?

Answer 10

• Disqualify accountant from perparing report (guilty of prof mis, failed to exercise care and skill)
• Can specify matters you must insure are incorporated
• Firm must provide all information accountant requires

Question 11

For how long must accounting records be securely stored and retained for?

Answer 11

At least 6 years

Question 12

Is a joint account a client account?

Answer 12

• No - but money held in a joint account is still client money
• Joint account allows solicitor/authorised body to operate and manage account/money along with another person (client, law firm, TP)

Question 13

What is the consequence of those named on joint account having equal access?

Answer 13

Risks to a client’s money could be higher than if money was kept in firm’s client account with processes/safeguards to authorise withdrawals

Obligation is to always safeguard money and assets clients entrust to u

Question 14

What SRA Accounts Rules apply to a joint account?

Answer 14

• Obtain, at least every 5 weeks, statements from banks for all client and business accounts
• Keep readily accessible central record of all bills and other written notifications
• Obligation to obtain accountant’s report
• Keep for 6 years at least

Question 15

If you operate a client’s own account as a signatory, what must you complete at least every 5 weeks?

Answer 15

A reconcilliation of the bank/building society statements balance for the account

Otherwise similar to operation of joint account

Rationale: if solicitor/authorised body is required to obtain accountant’s report = accountant may need access to these to make sure there are no issues of concern

Question 16

What is a third party managed account?

Answer 16

Account held at a bank/building society in name of TP which is an authorised payment institution regulated by FCA, in which monies are owned beneficially by TP and which is operated upon terms agreed between TP, you and your client as an escrow payment service

Question 17

What does and does not apply to TPMAs?

Answer 17

• Obligation on obtaining accountant’s report does not apply to TPMAs
• Obligation on securing accounting records securely for 6 years does apply to TPMAs

Question 18

Is money held in a TPMA ‘client money’?

Answer 18

No! It does not fall under the definition of client money as it is not held or received by the authorised body

Does not have to be held in accordance with SRA Accounts Rules

Question 19

What duties does the authorised body owe re TPMAs?

Answer 19

• Ensure TPMA does not result in them receiving/holding client’s money
• Ensure client understands rights/obligations and what use of TPMA means in their case (any charges/fees liable to pay and right to terminate and dispute payment requests)
• Obtain regular statements and ensure these reflect transactions on account correctly

Question 20

What are the requirements for the TPMA itself?

Answer 20

• Regulated by FCA
• Authorised payment institution
• An account at a bank/building society
• Operated as an escrow payment service (TP receives and disburses money on you and client’s behalf)
• Monies in TPMA must be owned beneficially by TP

Question 21

Is the SRA’s permission required to use a TPMA?

Answer 21

No - but they expect to be notified if one is being used (especially if more than one being used)

Question 22

Why is the distinction between client and non-client money important?

Answer 22

Rule 4.1 requires client money to be kept separate from money belonging to authorised body (and rule 2.3 requires you ensure client money is paid promptly into a client account)

Question 23

What is non-client money?

Answer 23

Anything that does not fall under client money definition in Rule 2.1

Question 24

What are the 4 types of client money under Rule 2.1?

Answer 24

Money held or received by you…

1. Relating to regulated services (legal and professional services) delivered by you to a client - covers vast majority of work done for client
2. That belongs to someone else (a third party) but received by solicitor in relation to regulated services delivered by solicitor e.g. money sent by seller’s solicitor at exchange as a deposit for property purchase (does not belong to client technically but is still ‘client money’)
3. As a T or holder of specified office/appointment; ‘non-solicitor’ roles e.g. acting as donee of a power of attornery
4. In respect of its fees and unpaid disbursements it held or received before a bill is delivered - i.e. will remain client money until a bill is sent to client; stops being client money when bill is delivered

Question 25

What is a disbursement and how does it work re client money?

Answer 25

Disbursement = costs/expenses paid or to be paid to a TP on behalf of client which is added to final bill of client e.g. payment made to local authority for search to be carried out

If money received/held by firm in respect of disbursements but they have not yet been paid, the money is client money - will be non-client money once paid and client later reimburses firm

I.e.:

• Money received for disbursements not yet paid = client money
• Money is used to pay disbursements
• Money is received for paid disbursements when client reimburses = non-client money

I.e. money received in respect of paid disbursement = non-client

Example of paid disbursement…

• Need to pay LR to obtain documents on behalf of client who has no client money in his account
• Must pay LR fee out of firm’s business account
• Client sends a cheque to reimburse you for LR fees which you paid
• This cheque is non-client money and belongs to the authorised body (money received by you in respect of a paid disbursement and falls outside of Rule 2.1)

Question 26

Normal examples of client money

Answer 26

• Money received from client on ‘account of costs’ = client provides money to cover likely costs of matter once solicitor instructed e.g. cover search fees for property purchase
• Money recieved in respect of unpaid costs or expenses = SDLT, LR fees and court fees which have not yet been paid
• Mortgage money received from lender (TP) on behalf of client

Question 27

What happens if there are insufficient funds held by specific client to make a certain payment?

Answer 27

Cannot withdraw - 5.3: you should only withdraw client money if the account holds sufficient funds

Question 28

What are the rules re the client account itself?

Answer 28

• Must be at a branch of bank/building society in E+W
• Client account name includes: name of authorised body and word ‘client’
• Must not use a client account to provide banking facilities (to clients or third parties); payments/withdrawals from account are to be in respect of delivery by you of regulated services

Question 29

What does ‘paid promptly’ mean in the context of when client money should be paid into the client account?

I.e. client money should be paid promptly into a client account

Answer 29

No definition

Question 30

What are the 3 exceptions for paying client money promptly into a client account?

Answer 30

1. If doing so would conflict with obligations under rule/regulations relating to specified office or appointment (e.g. trustee)
2. Payments from Legal Aid Agency (do not have to be paid into client account)
3. If you agree in individual circumstances to an alternative arrangement

Question 31

What is the rule regarding breaches of rules upon discovery?

Answer 31

Must be corrected upon discovery; any money improperly withheld/withdrawn should be immediately paid into/replaced account as appropriat

Question 32

What is the rule on interest for a client account?

Answer 32

• Must account to clients/TP for a fair sum of interest on any client money held by you on their behalf
• But can agreee a different arrangement (e.g. keep it) so long as client gives consent

Question 33

What should you do when receiving mixed payments?

I.e. mix of client and non-client money

E.g. cheque from client part on account of costs and part to pay bill of costs

Answer 33

Must be allocated promptly to the correct client or business account

Business account will be another bank account in name of authorised body

Done by asking the bank to split the cheque

Question 34

What happens if mixed payment is paid into one account (either business or client account)?

Answer 34

This is fine - so long as the right amount of money is promptly moved from one to the other

I.e. will not be in breach!:)

Means some client money will be in business account for a short while and vice versa

Question 35

If money is sent to authorised body after body has paid for costs, must a bill be delivered before paying it into business account?

I.e. body has already paid for costs and then receives money from client

Answer 35

No! As the money received is for a paid cost (and not an unpaid one) it does not fall within client money definition and so is non-client money

I.e. client is reimbursing a paid disbursement - no bill needed

Question 36

After a bill has been sent to a client, what money sent by the client will be non-client money?

Answer 36

• Money sent for authorised body’s fees
• Money sent for unpaid costs/expenses

Is not client money!

Question 37

Do the same rules apply to separate designated client accounts as regular client accounts? I.e. E+W, name of account

Separate designated = additional account each to hold individual client’s money in (as opposed to holding in one client bank account as per)

Answer 37

Yes! Same rules apply

Question 38

What should be explained to a client if their money is not held in a client account because the authorised body does not have one?

Answer 38

• Where their money will be held
• Will not be held on account for them or ringfenced (insolvency implications!) and can be used as part of firm’s own money in business account

Client can then make informed decision

Under Rule 2.2, the authorised body is not required to hold this client money in a client account provided they have informed their client in advance of where and how the money will be held

Question 39

What rules are still relevant even if the authorised body is holding money but not in a client account?

(Because they do not have one)

Answer 39

• Client money returned promptly as soon as no proper reason to hold money (e.g. advance payments exceed final fees)
• Authorised body must have given client a bill/other written notification of costs (if some of client money used to pay their costs)
• Keep accurate records showing receipts and payments of client money in client ledger (even though no separate account)

Question 40

What rules are not still relevant if the authorised body is holding money but not in a client account?

(Because they do not have one)

Answer 40

• Obligation to pay promptly into client account and to keep separately (as there is not one!)
• Does not have to be available on demand
• Accounting to client for fair some of interest
• Requirement to obtain and deliver accountant’s report

Question 41

Must a client ledger still be used even if no separate client account?

Answer 41

Yes, but does not need to be a list of balances shown by client ledger accounts and does not need a cash book showing transactions through client account (as there is none)

Question 42

In what 3 circumstances can you withdraw client money from a client account?

Answer 42

1. For purpose for which it is being held
2. On instructions of client or TP for whom money is held
3. On SRA’s prior written authorisation or in prescribed circumstances

Question 43

What are the ‘prescribed circumstances’ in which client money can be withdrawn?

There is only 1:/

Answer 43

To withdraw residual client account balance of less than £500 on any one matter provided balance is a) paid to a charity of body’s choice and b) body has met conditions set out (taking reasonable steps to find rightful owner)

Question 44

For a withdrawal from the client account, is it okay that funds in the client account are sufficient even if the individual client does not have sufficient funds?

Answer 44

No!! You should only withdraw client money from a client account if sufficient funds are held on behalf of that specific client or TP to make payment

Would otherwise be spending other client’s money!

Question 45

When will there be a duty to return client money to client?

Answer 45

When there is no logner any proper reason to hold funds; once transaction ended

Unless instructing on new matter

Question 46

What is the process for transferring (non-client) money from client account to another account to pay your costs?

Answer 46

• Give bill of costs/written notification of incurred costs to client/paying party before transfer
• Any payment must be for specific sum identified in relevant bill/notification

Question 47

At what point will client money become non-client money when money in a client account is used to pay costs?

Answer 47

Once bill is delivered, money the authorised body has received re fees/unpaid disbursements and is holding in client account will no longer be client money and will become non-client money

Bill must be given and client must have sufficient money

Question 48

If a breach is discovered and money must be replaced, where does this come from?

Answer 48

Authorised body’s business account - so will involve a transfer of non-client money from authorised body to client account

Question 49

If a client seeks to challenge a bill of costs by detailed assessment, what is the timeframe within which an application must be made? If this is missed, when would a court maybe allow application at its discretion?

Answer 49

• Within one month of receiving solicitor’s bill
• If before 12 months of delivery of bill, court may allow application at discretion

Question 50

Can an application for detailed assessment be made after expiry of 12 months from delivery of bill or before expiry of 12 months after payment of bill?

Answer 50

Not without special circumstances - if order is made it may contain terms re costs of assessment as court thinks fit

Question 51

What application can be made after the expiry of 12 months after payment of bill?

Answer 51

None