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Answers for law firms
What do the SRA Accounts Rules require?
The SRA Accounts Rules set how a regulated firm holds and handles money that belongs to its clients and to third parties. The current rules have been in force since 25 November 2019. They are short, and they leave the detail of how to comply to each firm. This page sets out what each main rule requires and how firms usually meet it.
| Rule | What it requires |
|---|---|
| 2.1 | Defines “client money”. Money held for a client or a third party in connection with the firm’s regulated services, money held as a trustee or office holder, and fees and unpaid disbursements received before a bill |
| 2.3 | Pay “client money” promptly into a client account, with narrow exceptions |
| 2.4 | Keep “client money” available on demand unless agreed otherwise in writing |
| 2.5 | Return “client money” promptly once there is no longer a proper reason to hold it |
| 3.3 | Never use a client account to provide banking facilities |
| 4.1 | Keep “client money” separate from the firm’s own money |
| 4.3 | Give a bill or written notice of costs before taking fees from “client money” |
| 5.1 | Withdraw “client money” only for its purpose, on instructions, or with the SRA’s authorisation |
| 7.1 | Account for a fair sum of interest |
| 8.3 | Reconcile every client account at least every five weeks, signed off by the COFA or a manager |
| 11 | Conditions for using a third-party managed account instead |
| 12 | Obtain an annual accountant’s report, unless exempt |
| 13 | Keep accounting records securely for at least six years |
What counts as “client money”?
Rule 2.1 sets four categories. Money relating to regulated services the firm delivers to a client. Money held for a third party in relation to those services. Money held as a trustee or as the holder of a specified office. And money for fees and unpaid disbursements received before the firm has sent a bill. That last category catches firms out, because money on account of costs is “client money” until the bill goes.
Rule 2.2 lets a firm that only ever holds that last category, and meets its other conditions, avoid running a client account at all, as long as it tells the client in advance where and how the money will be held. For the basics of the account itself, see What is a client account?
Handling the money day to day
- Separation. Rule 4.1 keeps “client money” apart from the firm’s money. Rule 4.2 requires mixed payments to be split to the right account promptly.
- Withdrawals. Rule 5.1 allows money out only for the purpose it is held for, on the client’s or third party’s instructions, or with the SRA’s prior written authorisation or in prescribed circumstances.
- Fees. Under rule 4.3 the firm gives a bill or written notice of costs before moving money to pay itself, and takes only the sum billed.
- No banking facility. Rule 3.3 bars using the client account to hold or move money that has no underlying legal work.
- Interest. Rule 7.1 requires a fair sum of interest. The firm’s written policy says how it works that out.
Records, reconciliations and reports
Rule 8.1 requires accurate, contemporaneous and chronological records, including a ledger for each client and a running list of client balances. Rule 8.3 requires a reconciliation of every client account at least every five weeks, with any difference investigated promptly. The record must be signed off by the COFA or a manager. See What does a COFA do?
Rule 12 requires an accountant’s report within six months of the end of each accounting period in which the firm held “client money”. The firm sends it to the SRA only if it is qualified in a way that shows “client money” at risk. A firm does not need a report if all its “client money” came from the Legal Aid Agency, or if its client account balances stayed within an average of £10,000 and a maximum of £250,000 during the period. The SRA can still ask for one. Rule 13 requires accounting records to be kept securely for at least six years.
The third-party managed account route
Rule 11 lets a firm agree with a client to use a third-party managed account (TPMA), where using it does not result in the firm receiving or holding the client’s money. Before taking instructions, the firm takes reasonable steps to make sure the client understands the terms, including how fees are paid and by whom, and the client’s rights to end the arrangement and dispute payment requests. The firm then obtains regular statements and checks they reflect every transaction.
The SRA Glossary defines the account as one held at a bank or building society in the name of a third party that is an authorised payment institution or a small payment institution, regulated by the FCA, with safeguarding arrangements under the Payment Services Regulations 2017, and operated as an escrow payment service on terms agreed between the provider, the firm and the client. See What is a third-party managed account (TPMA)?
What firms typically do
- Finish client due diligence before taking money into client account, other than for fees, and share account details only when ready to receive.
- Check each receipt against the payer they expected, and hold off accepting unexplained third-party money until they understand it.
- Run the reconciliation on a fixed cycle shorter than five weeks, so a late month never pushes it past the limit.
- Review aged balances each month and return money as soon as a matter ends, to the person it came from.
- Keep a short written policy on interest and on cash, and apply it the same way every time.
Common mistakes
- Paying money on account of costs into the office account before a bill has been sent.
- Leaving small balances on closed matters for months.
- Letting a client park money in client account with no legal work behind it.
- Reconciling, finding a difference, and signing off without resolving it.
A worked example
A sale completes and the firm is left holding £180 that the client overpaid for searches. The money is “client money” under rule 2.1. There is no longer a reason to hold it, so rule 2.5 says return it promptly. The cashier sends it back to the account the client paid from and notes the matter ledger. If the client had become untraceable, the firm could take the money out only in line with rule 5.1, which means the SRA’s authorisation or its prescribed circumstances.
For a longer walk-through of each rule, read SRA Accounts Rules explained.
Questions firms ask
When did the current SRA Accounts Rules come in?
On 25 November 2019.
How often must a firm reconcile its client account?
At least every five weeks, for every client account, with the record signed off by the COFA or a manager (rule 8.3).
Does every firm need an accountant’s report?
No. A firm is exempt if all its “client money” came from the Legal Aid Agency, or if its balances stayed within an average of £10,000 and a maximum of £250,000 in the period. The SRA can still require one (rule 12).
Is money on account of costs “client money”?
Yes, until the firm has sent a bill for those fees or disbursements (rule 2.1(d)).
Which rule allows third-party managed accounts?
Rule 11. It allows a TPMA where the firm does not receive or hold the client’s money, the client understands the terms, and the firm checks regular statements.
How long must accounting records be kept?
At least six years, stored securely (rule 13).