Ethics guidance

Withdrawal of residual client balances

Issued on 31 October 2014

Status

Whilst this document does not form part of the SRA Handbook, the SRA may have regard to it when exercising its regulatory functions.

Who is this guidance relevant to?

This guidance is relevant to all practitioners who hold client money; Compliance Officers for Finance and Administration (COFAs); for firms that deal with client money and to accountants preparing applications on behalf of such firms.

Purpose of this guidance

Practitioners will often hold money on behalf of clients and although all client money will usually be used in the process of carrying out the retainer this is not always the case. This guidance is intended to assist when dealing with residual client balances (i.e. money due to clients where the client has become untraceable or where it has otherwise not been possible to return the money to the client) and designed to provide a framework that practitioners may find useful when dealing with such balances.

The SRA Principles

You must:

  • act in the best interests of each client; (Principle 4)
  • provide a proper standard of service to your clients; (Principle 5) and
  • protect client money and assets. (Principle 10)

The SRA Rules

In these circumstances, the SRA Accounts Rules 2011 (Accounts Rules) require practitioners to return client money (including refunds received after the client has been accounted to) as soon as there is no longer a proper reason to retain that money (Rule 14.3). Therefore practitioners should, at the start of a retainer, consider how any residual balance that may arise will be returned and request appropriate information from clients, such as their national insurance number. The practitioner should also remind clients at the end of the retainer of their responsibility to provide them with an up to date address and contact details.

Imposing the obligation to return client money under rule 14.4 of the Accounts Rules goes to the heart of practitioners' duties. However, there are circumstances where it may not be possible for a practitioner to return client money. This may arise where the client has changed their contact details without notifying the practitioner, which further underlines the importance of returning client money as swiftly as possible.

Residual balances of £500 or less

Rule 20.1(j) of the Accounts Rules allows the withdrawal of residual client balances from the client account where the amount withdrawn does not exceed £500 in relation to any one individual client or trust matter and practitioners meet the criteria specified in Rule 20.2. The criteria requires practitioners to:

  • a) establish the identity of the owner of the money, or make reasonable attempts to do so;
  • b) make adequate attempts to ascertain the proper destination of the money, and to return it to the rightful owner, unless the reasonable costs of doing so are likely to be excessive in relation to the amount held;
  • c) pay the funds to a charity.
  • d) record the steps taken in accordance with the requirements above and retain those records, together with all relevant documentation (including receipts from the charity), in accordance with Rule 29.16 and 29.17(a); and
  • e) keep a central register in accordance with Rule 29.22.

Residual balances above £500

Rule 20.1(k) allows practitioners to withdraw residual client balances above £500 from the client account and donate the money to a charity on the written authorisation of the Solicitors Regulation Authority (SRA). The SRA may impose a condition that the money is paid to a charity which gives an indemnity against any legitimate claim subsequently made for the sum received. In determining whether to grant authorisation, the SRA will assess the adequacy of the steps taken to identify the owner and return the funds.

Where it is intended that the money which is to be withdrawn from the client account is not going to be paid to a charity, for example, where a firm which to pay the money into the office account, it will still be necessary to make an application to the SRA. This situation might arise, for example, where it has not been possible for the practitioner to deliver a bill of costs because the client has become untraceable, with the consequence that the practitioner cannot make a transfer from client account to office account in accordance with Rules 17.2 and 17.3 of the Accounts Rules.

Furthermore, in relation to the administration of an estate or trust, it will normally be the executors, administrators or trustees, or the Court, who have authority to deal with unpaid money. Practitioners should therefore satisfy themselves as to any legal requirements in relation to their dealings with client money.

Establish the identity of the owner of the money, or make reasonable attempts to do so

What are reasonable steps to take in establishing the identity of the owner of client money will vary, depending on the situation. Factors affecting what will be considered reasonable include, but are not limited to:

  • the age of the residual balance;
  • the amount held;
  • the client details available in respect of a balance and
  • the costs associated with a particular tracing method.

Therefore, it is likely to be considered to be reasonable to require more intensive tracing efforts for larger or more recent residual balances, or for balances where more details are held about the client. Importantly practitioners should be aware that the absence of client details may highlight deficiencies in a firm's accounting practices and in the overall management and supervision of the firm as required by the outcomes in Chapter 7 of the SRA Code of Conduct.

The steps below provide a suggested framework for practitioners to employ when attempting to return residual client balances. However, it is worth highlighting that practitioners may identify other processes which also allow them to take reasonable steps to trace clients.

  • 1.

    Client file
    The client file is checked and all available contact details are used to try and contact the client or relevant third parties.

  • 2.

    Internet search
    An internet search is undertaken.

  • 3.

    Directory enquiries
    A Directory Enquiries search is undertaken.

  • 4.

    Electoral Register
    If a previous address is available for the client, an Electoral Register search is undertaken in the appropriate area.

  • 5.

    DWP letter forwarding service
    The Department for Work & Pensions (DWP) provides a tracing and letter forwarding service that can be used to forward beneficial information to clients where complete details are not held by the sender. The service costs less than £5 and has proved successful for many firms. This service can be utilised where you have an address or a previous address for the client. The letter may include a reference to the fact that monies are held for the client, but you should not include bills for forwarding to the client.

    Find out more about the DWP letter forwarding service

    Companies House
    If the balance belongs to a company, a Companies House search may be used to identify a current address if the company is still trading. Any monies due to a dissolved company pass to the Crown as bona vacantia and will be payable to the Treasury Solicitor under provisions in the Companies Act. Practitioners should clarify the situation with the Treasury Solicitor's Department before making make an application to the SRA under Rule 20.1(k).

  • 6.

    Newspaper advertisement/tracing agent
    The cost of placing an advert in a newspaper (or other publication) or instructing a tracing agent will vary. However practitioners should still explore the cost implications of using these services if steps 1-6 above have proved unsuccessful and also take into account the likelihood of tracing the client using such methods, in the light of the information held about the client or third party to whom the monies are due.

    Where the costs of placing an advertisement or instructing a tracing agent are unreasonable when compared with the balance in question, it is likely to be considered to be appropriate to withdraw a balance under £500 from the client account and pay the money to a charity.

 

Record Keeping

Practitioners are required to record the steps taken and retain those records, together with all relevant documentation (including receipts from the charity), in accordance with rule 29.16 and 29.17(a) and keep a central register in accordance with rule 29.22

Taken together, these rules require practitioners to:

  • record the steps taken to try to identify the owner of the residual client balance and return the funds to them (including receipts from the recipient charity);
  • keep a central register which details the
    • name of the client or other person or trust on whose behalf the money is held (if known),
    • residual balance amount,
    • name of the recipient charity,
    • date of payment.

Practitioners must retain these for at least six years from the date of the last entry.

Practitioners should not destroy files without clients consent and are advised not to archive files where a client balance remains, until such time as the balance is cleared.

When involved with mergers/acquisitions, acquiring firms are advised not to accept liability for existing client balances without taking receipt of the relevant files.

Practitioners attention is drawn to the provisions of Rule 29.25 that makes clear firms should be able to justify the use of a suspension account and use of such an account must only be temporary.

Out-of-pocket expenses under £500

Solicitors have no legal authority to take out of pocket expenses. If such expenses are deducted the solicitor remains responsible to the client for these monies should they be traced. Such expenses, in all circumstances, should be reasonable expenses, for example; tracing agents fees; advertisements; DWP searches, but would not include the administrative or office costs of the firm tracing the client or writing letters.

Where practitioners make an application to the SRA for authority to withdraw client money from a client account and incur out-of-pocket expenses, these can be taken into account by a decision maker, if the attempts to trace the client have not been successful.

Please note that if you make an application for authorisation to withdraw a residual client balance, the outcome will be available to other SRA business units. If the application is granted, details of the authorisation will also be publicly available if an enquiry is received by the SRA.

Further help

If you require further assistance in relation to your accounting requirements, contact us.

To make an application for sums over £500 please complete our application form (DOC 2 pages, 554K).