SRA Handbook

General

Back to version 21

Version 6 of the Handbook was published on 01/01/2013. For more information, please click 'History' Above

Part 1: General

Rule 1: The overarching objective and underlying principles

1.1

The purpose of these rules is to keep client money safe. This aim must always be borne in mind in the application of these rules.

1.2

You must comply with the Principles set out in the Handbook, and the outcomes in Chapter 7 of the SRA Code of Conduct in relation to the effective financial management of the firm, and in particular must:

(a)

keep other people's money separate from money belonging to you or your firm;

(b)

keep other people's money safely in a bank or building society account identifiable as a client account (except when the rules specifically provide otherwise);

(c)

use each client's money for that client's matters only;

(d)

use money held as trustee of a trust for the purposes of that trust only;

(e)

establish and maintain proper accounting systems, and proper internal controls over those systems, to ensure compliance with the rules;

(f)

keep proper accounting records to show accurately the position with regard to the money held for each client and trust;

(g)

account for interest on other people's money in accordance with the rules;

(h)

co-operate with the SRA in checking compliance with the rules; and

(i)

deliver annual accountant's reports as required by the rules.

Rule 2: Interpretation

2.1

The guidance notes do not form part of the rules.

2.2

The SRA Handbook Glossary 2012 shall apply and, unless the context otherwise requires:

(a)

all italicised terms shall be defined; and

(b)

all terms shall be interpreted,

in accordance with the Glossary.

Guidance notes

(i)

The effect of the definition of "you" is that the rules apply equally to all those who carry on or work in a firm and to the firm itself. See also rule 4 (persons governed by the rules) and rule 5 (persons exempt from the rules).

(ii)

The general definition of "office account" is wide. However, rule 17.1(b) (receipt and transfer of costs) and rule 19.1(b) and 19.2(b) (payments from the Legal Services Commission) specify that certain money is to be placed in an office account at a bank or building society. Out-of-scope money can be held in an office account (which could be an account regulated by another regulator); it must not be held in a client account.

(iii)

For a flowchart summarising the effect of the rules, see Appendix 1. For more details of the treatment of different types of money, see the chart "Special situations - what applies" at Appendix 2. These two appendices do not form part of the rules but are included to help solicitors and their staff find their way about the rules.

Rule 3: Geographical scope

3.1

Parts 1 to 6 of these rules apply to practice carried on from an office in England and Wales. Part 7 of these rules applies to practice carried on from an office outside England and Wales.

Rule 4: Persons governed by the rules

4.1

Save as provided in rule 4.2 below, Parts 1 to 6 of these rules apply to you.

4.2

In relation to an MDP, the rules apply to you only in respect of those activities for which the MDP is regulated by the SRA.

4.3

Part 6 of the rules (accountants' reports) also applies to reporting accountants.

4.4

If you have held or received client money, but no longer do so, whether or not you continue in practice, you continue to be bound by some of the rules.

Guidance notes

(i)

"You" is defined in the Glossary. All employees of a recognised body or licensed body are directly subject to the rules, following changes made by the Legal Services Act 2007. All employees of a recognised sole practitioner are also directly subject to the rules under sections 1B and 34A of the Solicitors Act 1974. Non-compliance by any member of staff will also lead to the principals being in breach of the rules - see rule 6. Misconduct by an employee can also lead to an order of the SRA or the Solicitors Disciplinary Tribunal under section 43 of the Solicitors Act 1974 imposing restrictions on his or her employment.

(ii)

Rules which continue to apply to you where you no longer hold client money include:

(a)

rule 7 (duty to remedy breaches);

(b)

rule 17.2 and 17.8, rule 29.15 to 29.24 and rule 30 (retention of records);

(c)

rule 31 (production of documents, information and explanations);

(d)

Part 6 (accountants' reports), and in particular rule 32 and rule 33.5 (delivery of final report), and rule 35.2 and rule 43 (completion of checklist).

(iii)

The rules do not cover trusteeships carried on in a purely personal capacity outside any legal practice. It will normally be clear from the terms of the appointment whether you are being appointed in a purely personal capacity or in your professional capacity. If you are charging for the work, it is clearly being done in a professional capacity. Use of professional stationery may also indicate that the work is being done in a professional capacity.

(iv)

A solicitor who wishes to retire from private practice will need to make a decision about any professional trusteeship. There are three possibilities:

(a)

continue to act as a professional trustee (as evidenced by, for instance, charging for work done, or by continuing to use the title "solicitor" in connection with the trust). In this case, the solicitor must continue to hold a practising certificate, and money subject to the trust must continue to be dealt with in accordance with the rules.

(b)

continue to act as trustee, but in a purely personal capacity. In this case, the solicitor must stop charging for the work, and must not be held out as a solicitor (unless this is qualified by words such as "non-practising" or "retired") in connection with the trust.

(c)

cease to be a trustee.

(v)

A licensed body may undertake a range of services, comprising both "traditional" legal services and other, related, services of a non-legal nature, for example, where a solicitor, estate agent and surveyor set up in practice together. Where a licensed body practises in this way (an MDP), only some of the services it provides (reserved and other legal activities, and other activities which are subject to one or more conditions on the body's licence) are within the regulatory reach of the SRA. Other, "non-legal", activities of the licensed body may be regulated by another regulator, and some activities may not fall within the regulatory ambit of any regulator.

Rule 5: Persons exempt from the rules

5.1

The rules do not apply to you when:

(a)

practising as an employee of:

(i)

a local authority;

(ii)

statutory undertakers ;

(iii)

a body whose accounts are audited by the Comptroller and Auditor General;

(iv)

the Duchy of Lancaster;

(v)

the Duchy of Cornwall; or

(vi)

the Church Commissioners; or

(b)

practising as the Solicitor of the City of London; or

(c)

carrying out the functions of:

(i)

a coroner or other judicial office; or

(ii)

a sheriff or under-sheriff; or

(d)

practising as a manager or employee of an authorised non-SRA firm, and acting within the scope of that firm's authorisation to practise.

Guidance note

(i)

A person practising as a manager or employee of an authorised non-SRA firm is exempt from the Accounts Rules when acting within the scope of the firm's authorisation. Thus if a solicitor is a partner or employee in a firm authorised by the Council for Licensed Conveyancers, the rules will not apply to any money received by the solicitor in connection with conveyancing work. However if the solicitor does in-house litigation work - say collecting money owed to the firm - the Accounts Rules will apply to any money received by the solicitor in that context. This is because, whilst in-house litigation work is within the scope of the solicitor's authorisation as an individual, it is outside the scope of authorisation of the firm.

Rule 6: Principals' responsibility for compliance

6.1

All the principals in a firm must ensure compliance with the rules by the principals themselves and by everyone employed in the firm. This duty also extends to the directors of a recognised body or licensed body which is a company, or to the members of a recognised body or licensed body which is an LLP. It also extends to the COFA of a firm (whether a manager or non-manager).

Guidance note

(i)

Rule 8.5(d) of the SRA Authorisation Rules requires all firms to have a COFA. The appointment of a COFA satisfies the requirement under section 92 of the Legal Services Act 2007 for a licensed body to appoint a Head of Finance and Administration. Under rule 6 of the accounts rules, the COFA must ensure compliance with the accounts rules. This obligation is in addition to, not instead of, the duty of all the principals to ensure compliance (the COFA may be subject to this duty both as COFA and as a principal). Under rule 8.5(e) of the SRA Authorisation Rules, the COFA must report any breaches of the accounts rules to the SRA as soon as reasonably practicable. (See also outcomes 10.3 and 10.4 of Chapter 10 of the SRA Code of Conduct in relation to the general duty to report serious financial difficulty or serious misconduct.)

Rule 7: Duty to remedy breaches

7.1

Any breach of the rules must be remedied promptly upon discovery. This includes the replacement of any money improperly withheld or withdrawn from a client account.

7.2

In a private practice, the duty to remedy breaches rests not only on the person causing the breach, but also on all the principals in the firm. This duty extends to replacing missing client money from the principals' own resources, even if the money has been misappropriated by an employee or another principal, and whether or not a claim is subsequently made on the firm's insurance or the Compensation Fund.

Rule 8: Liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes

8.1

If in the course of practice you act as:

(a)

a liquidator,

(b)

a trustee in bankruptcy,

(c)

a Court of Protection deputy, or

(d)

a trustee of an occupational pension scheme which is subject to section 47(1)(a) of the Pensions Act 1995 (appointment of an auditor) and section 49(1) (separate bank account) and regulations under section 49(2)(b) (books and records),

you must comply with:

(i)

the appropriate statutory rules or regulations;

(ii)

the Principles referred to, and the underlying principles set out, in rule 1; and

(iii)

the requirements of rule 8.2 to 8.4 below;

and will then be deemed to have satisfactorily complied with the Accounts Rules.

8.2

In respect of any records kept under the appropriate statutory rules, there must also be compliance with:

(a)

rule 29.15 - bills and notifications of costs;

(b)

rule 29.17(c) - retention of records;

(c)

rule 29.20 - centrally kept records;

(d)

rule 31 - production of documents, information and explanations; and

(e)

rule 39.1(l) and (p) - reporting accountant to check compliance.

8.3

If a liquidator or trustee in bankruptcy uses any of the firm's client accounts for holding money pending transfer to the Insolvency Services Account or to a local bank account authorised by the Secretary of State, he or she must comply with the Accounts Rules in all respects whilst the money is held in the client account.

8.4

If the appropriate statutory rules or regulations do not govern the holding or receipt of client money in a particular situation (for example, money below a certain limit), you must comply with the Accounts Rules in all respects in relation to that money.

Guidance notes

(i)

The Insolvency Regulations 1994 (S.I. 1994 no. 2507) regulate liquidators and trustees in bankruptcy.

(ii)

The Court of Protection Rules 2007 (S.I. 2007 no. 1744 (L.12)) regulate Court of Protection deputies.

(iii)

Money held or received by liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes is client money but, because of the statutory rules and rule 8.1, it will not normally be kept in a client account. If for any reason it is held in a client account, the Accounts Rules apply to that money for the time it is so held (see rule 8.3 and 8.4).

Rule 9: Joint accounts

9.1

If, when acting in a client's matter, you hold or receive money jointly with the client, another practice or another third party, the rules in general do not apply, but the following must be complied with:

(a)

rule 29.11 - statements from banks, building societies and other financial institutions;

(b)

rule 29.15 - bills and notifications of costs;

(c)

rule 29.17(b)(ii) - retention of statements and passbooks;

(d)

rule 29.21 - centrally kept records;

(e)

rule 31 - production of documents, information and explanations; and

(f)

rule 39.1(m) and (p) - reporting accountant to check compliance.

A joint account is not a client account but money held in a joint account is client money.

Operation of the joint account by you only

9.2

If the joint account is operated only by you, you must ensure that you receive the statements from the bank, building society or other financial institution in accordance with rule 29.11, and have possession of any passbooks.

Shared operation of the joint account

9.3

If you share the operation of the joint account with the client, another practice or another third party, you must:

(a)

ensure that you receive the statements or duplicate statements from the bank, building society or other financial institution in accordance with rule 29.11, and retain them in accordance with rule 29.17(b)(ii); and

(b)

ensure that you either have possession of any passbooks, or take copies of the passbook entries before handing any passbook to the other signatory, and retain them in accordance with rule 29.17(b)(ii).

Operation of the joint account by the other account holder

9.4

If the joint account is operated solely by the other account holder, you must ensure that you receive the statements or duplicate statements from the bank, building society or other financial institution in accordance with rule 29.11, and retain them in accordance with rule 29.17(b)(ii).

Rule 10: Operation of a client's own account

10.1

If, in the course of practice, you operate a client's own account as signatory (for example, as donee under a power of attorney), the rules in general do not apply, but the following must be complied with:

(a)

rule 30.1 to 30.4 - accounting records for clients' own accounts;

(b)

rule 31 - production of documents, information and explanations; and

(c)

rule 39.1(n) and (p) - reporting accountant to check compliance.

Operation by you only

10.2

If the account is operated by you only, you must ensure that you receive the statements from the bank, building society or other financial institution in accordance with rule 30, and have possession of any passbooks.

Shared operation of the account

10.3

If you share the operation of the account with the client or a co-attorney outside your firm, you must:

(a)

ensure that you receive the statements or duplicate statements from the bank, building society or other financial institution and retain them in accordance with rule 30.1 to 30.4; and

(b)

ensure that you either have possession of any passbooks, or take copies of the passbook entries before handing any passbook to the client or co-attorney, and retain them in accordance with rule 30.1 to 30.4.

Operation of the account for a limited purpose

10.4

If you are given authority (whether as attorney or otherwise) to operate the account for a limited purpose only, such as the taking up of a share rights issue during the client's temporary absence, you need not receive statements or possess passbooks, provided that you retain details of all cheques drawn or paid in, and retain copies of all passbook entries, relating to the transaction, and retain them in accordance with rule 30.1 to 30.3.

Application

10.5

This rule applies only to private practice. It does not cover money held or received by a donee of a power of attorney acting in a purely personal capacity outside any legal practice (see rule 4, guidance notes (iii)-(iv)).

10.6

A "client's own account" covers all accounts in a client's own name, whether opened by the client himself or herself, or by you on the client's instructions under rule 15.1(b). A "client's own account" also includes an account opened in the name of a person designated by the client under rule 15.1(b).

Guidance notes

(i)

Money held in a client's own account (under a power of attorney or otherwise) is not "client money" for the purpose of the rules because it is not "held or received" by you. If you close the account and receive the closing balance, this becomes client money subject to all the rules.

(ii)

Merely paying money into a client's own account, or helping the client to complete forms in relation to such an account, is not "operating" the account.

(iii)

If as executor you operate the deceased's account (whether before or after the grant of probate), you will be subject to the limited requirements of rule 10. If the account is subsequently transferred into your name, or a new account is opened in your name, you will have "held or received" client money and are then subject to all the rules.

Rule 11: Firm's rights not affected

11.1

Nothing in these rules deprives you of any recourse or right, whether by way of lien, set off, counterclaim, charge or otherwise, against money standing to the credit of a client account.

Rule 12: Categories of money

12.1

These rules do not apply to out-of-scope money, save to the limited extent specified in the rules. All other money held or received in the course of practice falls into one or other of the following categories:

(a)

"client money" - money held or received for a client or as trustee, and all other money which is not office money; or

(b)

"office money" - money which belongs to you or your firm.

12.2

"Client money" includes money held or received:

(a)

as trustee;

(b)

as agent, bailee, stakeholder, or as the donee of a power of attorney, or as a liquidator, trustee in bankruptcy, Court of Protection deputy or trustee of an occupational pension scheme;

(c)

for payment of unpaid professional disbursements;

(d)

for payment of stamp duty land tax, Land Registry registration fees, telegraphic transfer fees and court fees (but see also guidance note (i));

(e)

as a payment on account of costs generally;

(f)

as a financial benefit paid in respect of a client, unless the client has given you prior authority to retain it (see Chapter 1, outcome 1.15 and indicative behaviour 1.20 of the SRA Code of Conduct);

(g)

jointly with another person outside the firm.

12.3

Money held to the sender's order is client money.

(a)

If money is accepted on such terms, it must be held in a client account.

(b)

However, a cheque or draft sent to you on terms that the cheque or draft (as opposed to the money) is held to the sender's order must not be presented for payment without the sender's consent.

(c)

The recipient is always subject to a professional obligation to return the money, or the cheque or draft, to the sender on demand.

12.4

An advance to a client which is paid into a client account under rule 14.2(b) becomes client money.

12.5

A cheque in respect of damages and costs, made payable to the client but paid into a client account under rule 14.2(e), becomes client money.

12.6

Endorsing a cheque or draft over to a client or employer in the course of practice amounts to receiving client money. Even if no other client money is held or received, you must comply with some provisions of the rules, e.g.:

(a)

rule 7 (duty to remedy breaches);

(b)

rule 29 (accounting records for client accounts, etc.);

(c)

rule 31 (production of documents, information and explanations);

(d)

rule 32 (delivery of accountants' reports).

12.7

"Office money" includes:

(a)

money held or received in connection with running the firm; for example, PAYE, or VAT on the firm's fees;

(b)

interest on general client accounts; the bank or building society should be instructed to credit such interest to the office account - but see also rule 14.2(d);

(c)

payments received in respect of:

(i)

fees due to the firm against a bill or written notification of costs incurred, which has been given or sent in accordance with rule 17.2;

(ii)

disbursements already paid by the firm;

(iii)

disbursements incurred but not yet paid by the firm, but excluding unpaid professional disbursements;

(iv)

money paid for or towards an agreed fee;

(d)

money held in a client account and earmarked for costs under rule 17.3;

(e)

money held or received from the Legal Services Commission as a regular payment (see rule 19.2).

12.8

If a firm conducts a personal or office transaction - for instance, conveyancing - for a principal (or for a number of principals), money held or received on behalf of the principal(s) is office money. However, other circumstances may mean that the money is client money, for example:

(a)

If the firm also acts for a lender, money held or received on behalf of the lender is client money.

(b)

If the firm acts for a principal and, for example, his or her spouse jointly (assuming the spouse is not a partner in the practice), money received on their joint behalf is client money.

(c)

If the firm acts for an assistant solicitor, consultant or non-solicitor employee, or (if it is a company) a director, or (if it is an LLP) a member, he or she is regarded as a client of the firm, and money received for him or her is client money - even if he or she conducts the matter personally.

Guidance notes

(i)

Money held or received for payment of stamp duty land tax, Land Registry registration fees, telegraphic transfer fees and court fees is not office money because you have not incurred an obligation to HMRC, the Land Registry, the bank or the court to pay the duty or fee; (on the other hand, if you have already paid the duty or fee out of your own resources, or have received the service on credit, or the bank's charge for a telegraphic transfer forms part of your profit costs, payment subsequently received from the client will be office money);

(ii)

Money held:

(a)

by liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes;

(b)

jointly with another person outside the practice (for example, with a lay trustee, or with another firm);

is client money, subject to a limited application of the rules - see rules 8 and 9. The donee of a power of attorney, who operates the donor's own account, is also subject to a limited application of the rules (see rule 10), although money kept in the donor's own account is not "client money" because it is not "held or received" by the donee.

(iii)

If the SRA intervenes in a practice, money from the practice is held or received by the SRA's intervention agent subject to a trust under Schedule 1 paragraph 7(1) of the Solicitors Act 1974, and is therefore client money. The same provision requires the agent to pay the money into a client account.

(iv)

Money held or received in the course of employment when practising in one of the capacities listed in rule 5 (persons exempt from the rules) is not "client money" for the purpose of the rules, because the rules do not apply at all.

(v)

The receipt of out-of-scope money of an MDP which is mixed with other types of money is dealt with in rules 17 and 18.

(vi)

See Appendices 1 and 2 (which do not form part of the rules) for a summary of the effect of the rules and the treatment of different types of money.