23.1 Client Money and the Client Account

This independent OpenExamPrep chapter teaches Solicitors' Accounts as examined in SQE1 FLK2. OpenExamPrep is not the Solicitors Regulation Authority and does not claim official approval, review, or partnership with the SRA. The current instrument is the SRA Accounts Rules (made by the SRA Board on 30 May 2018). Map the syllabus from the SQE1 FLK2 assessment specification (from September 2026). From January 2027, FLK2 session 1 wraps this knowledge in wills and estate administration; session 2 wraps it in property and conveyancing. Ethics still pervades both sessions.

Rule 1.1 applies the Rules to authorised bodies, their managers and employees. Rule 1.2 makes the managers jointly and severally responsible for compliance by the body, its managers and employees. A newly qualified solicitor who banks a completion draft to the wrong account is not protected by being junior. For a licensed body, rule 1.3 limits the Rules to activities the SRA regulates under the licence.

Definition of client money — rule 2.1

Client money is money held or received by you:

Two classification traps dominate SQE1. First, 2.1(d) money is still client money. A cheque for 'your fees' that arrives before you have delivered a bill is not the firm's money. Paying it into the business account because 'we will bill on Friday' is a breach unless the narrow rule 2.2 exemption applies. Second, stakeholder money is client money under 2.1(b). It is not the seller's money and it is not the firm's money. If you act for the seller and hold the deposit as stakeholder, you hold it for both parties on the contract terms until the event that releases it.

Rule 2.2 is not a general 'small firm' escape. You may keep 2.1(d) money out of a client account only if that is the only client money you hold or receive, any disbursement money is for costs or expenses incurred by you on the client's behalf and for which you are liable, you do not for any other reason maintain a client account, and you have told the client in advance where and how the money will be held. If those conditions are met, rules 2.3, 2.4, 4.1, 7, 8.1(b) and (c) and 12 do not apply to that money. A firm that holds conveyancing deposits or estate cash cannot use rule 2.2.

Pay into client account, withhold, repay

Rule 2.3 — you ensure that client money is paid promptly into a client account unless:

1. in relation to 2.1(c) money, paying it in would conflict with the rules or regulations of that office or appointment (a Court of Protection deputy is often required to operate the client's own account, not the firm's client account);
2. the client money represents payments received from the Legal Aid Agency for your costs; or
3. you agree in the individual circumstances an alternative arrangement in writing with the client, or the third party for whom the money is held.

'Promptly' is not a fixed number of days in the Rules. Same-day or next-working-day banking is the operational standard that keeps you inside the word. A completion draft left in a fee-earner's tray from Friday until Wednesday is not prompt. Cash received at the counter is client money from the moment of receipt; it does not become client money only when it hits the bank.

Rule 2.4 — client money is available on demand unless you agree an alternative in writing. A designated notice-deposit account for a long administration can be proper if the personal representatives have given informed written agreement. Parking purchase money in a 90-day account because the rate looks attractive, without that agreement, breaches 2.4.

Rule 2.5 — you return client money promptly to the client, or the third party for whom it is held, as soon as there is no longer any proper reason to hold those funds, including refunds that arrive after you have already accounted. Leftover completion money, a surplus after redeeming the seller's charge, and residue sitting on an estate ledger after the final distribution are rule 2.5 problems. They are not a courtesy savings facility.

Meaning and name of a client account

Rule 3.1 — you only maintain a client account at a branch (or the head office) of a bank or a building society in England and Wales. A Scottish, Northern Irish, or overseas branch does not satisfy 3.1, even if the same banking group has a London office.

Rule 3.2 — the name of any client account includes (a) the name of the authorised body and (b) the word 'client', to distinguish it from any other type of account held or operated by the authorised body. 'Nair & Hughes LLP Client Account' is a client account name. 'Nair & Hughes LLP Current' is a business account. An account titled only with a matter name, or only with a client's initials, fails 3.2.

SRA record-keeping guidance still speaks of general (pooled) client accounts and separate designated client accounts. Designating an account for one estate or one purchase does not remove the need for the firm's name and the word 'client' in the title. Both types remain client accounts for rules 2 to 5, 7 and 8.

Not a banking facility — rule 3.3

You must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawals from, a client account must be in respect of the delivery by you of regulated services. The SRA warning notice Improper use of client account as a banking facility (updated 1 March 2023) and the cases it cites — Fuglers LLP v SRA [2014] EWHC 179 (Admin), Premji Naram Patel v SRA [2012] EWHC 3373 (Admin), and Attorney General of Zambia v Meer Care & Desai [2008] EWCA Civ 1007 — make the same point: running a private bank is not a proper part of a solicitor's everyday practice.

A live retainer is not enough. There must be a proper connection between the movement of money and the legal work you are actually doing. Ordinary conveyancing and estate payments sit inside that connection: the deposit on exchange, the balance on completion, SDLT or Land Transaction Tax, Land Registry fees, an estate agent's invoice related to the sale you are conducting, the discharge of the seller's charge under an undertaking, funeral expenses, IHT that the personal representatives must fund, and distributions under the will. Payments that sit outside it include: keeping sale proceeds after completion so you can pay the former client's credit cards, school fees, or a cousin overseas; holding money because the client finds it convenient or has no UK bank account; and moving cash between unrelated ledgers on request with no legal basis.

Rule 2.5 and rule 3.3 travel together. Once the purchase has completed and the charge is discharged, leftover buyer money must go back. Once the estate has been distributed, leftover residue must go to the person entitled. Technological change (internet banking) is part of the SRA's reason for treating historic 'we pay the outgoings for long-standing private clients' practice as a 3.3 breach. Insolvency colouring matters: allowing a client account to receive and pay money that a bank would freeze after a winding-up petition can engage Insolvency Act 1986 s.127 and personal risk. Money-laundering colouring is taught in FLK1 Legal Services; rule 3.3 is independent. You can breach 3.3 with no proven laundering.

Withdrawals and the first accounting entries

Rule 5.1 — you only withdraw client money from a client account (a) for the purpose for which it is being held, (b) following instructions from the client or the third party for whom it is held, or (c) on the SRA's prior written authorisation or in prescribed circumstances. Rule 5.2 — you appropriately authorise and supervise every withdrawal. Rule 5.3 — you only withdraw if sufficient funds are held on behalf of that specific client or third party. The pooled client-account balance is irrelevant. Paying client B's SDLT out of client A's credit is a 5.3 breach even if the bank statement still shows a large credit.

The prescribed residual-balance route under 5.1(c) is narrow. For £500 or less on any one matter you may pay a charity of your choice if you have taken reasonable steps to return the money (intensity depending on age, amount, and the contact details you hold), you record those steps and keep them for at least six years, you keep a central register (rightful owner, amount, charity name and number, date), you keep receipts and any indemnity, and you do not deduct tracing costs from the balance. Over £500 needs the SRA's authority before the money leaves the client account.

Rule 4.1 — you keep client money separate from money belonging to the authorised body. Rule 4.2 — you allocate mixed payments promptly to the correct client account or business account. Rule 4.3 — where client money will be used to pay your costs, you must give a bill of costs or other written notification of the costs incurred before you transfer anything from client account; the transfer must be for the specific sum identified and covered by the amount held for that particular client or third party. There is no round-sum 'on account of costs' withdrawal from client account without that written notification.

SQE1 double-entry uses a client ledger (client column and business/office column) and a cash book (client and business/office). The Rules say business account for the authorised body's money; many SQE materials still say office account. They are the same money. Receipt of client money: debit client cash, credit that client's ledger on the client column. Withdrawal of client money: debit the client column, credit client cash. The business columns do not move.

Worked receipt (property): on 1 June you receive £32,500 to hold as stakeholder on the sale of 9 Quay Lane. Client cash DR £32,500. Stakeholder/seller ledger, client column, CR £32,500. Worked withdrawal (wills): on 20 June you pay a funeral invoice of £4,200 from the estate's client money. Estate ledger, client column, DR £4,200. Client cash CR £4,200.

Exam traps: treating 2.1(d) money as already earned; using a non-England-and-Wales bank; withdrawing against the pooled balance; keeping a finished file as a savings account; transferring costs from client account before any bill or written notification.