Balancing the books

In November 2019, the Solicitors Regulation Authority (SRA) introduced its revised Standards and Regulations, which reduced the number of Accounts Rules from 52 to just 13. Not only were the rules reduced but we could also now make our own decisions. We had the power to decide our timescales, albeit closely monitored by our auditors.

Accounts Rule 2.5 states: “You ensure that client money is returned promptly to the client, or the third party for whom the money is held, as soon as there is no longer any proper reason to hold those funds.” (“Promptly” is a word that the SRA often likes to use, but it’s not (yet) a defined term.) 

Although this sounds straightforward, in reality, there are many reasons why money can remain in a client account even after the matter has been completed and all payments have been made. Perhaps someone miscalculated the completion statement by a couple of pounds, or the client sent an incorrect amount. Or maybe the disbursements were calculated incorrectly or there was a mistake made when working out the final payout. It could also be the case that you have balances from a merger with another firm, or a fee earner has left or retired, leaving incomplete information. You may also have difficulty in tracing the recipient. Any of these scenarios can result in a residual balance.

And in this fast-paced, ultra-busy world that we live in, people have many other matters, seemingly much more pressing, to deal with. So the small balance gets left, and can sit there for some time before the finance team identifies that the dormant client account still has money in it. 

However, as the most concerning breaches that are discovered by auditors are often around residual balances, I expect that any residual balances held by most – if not all – law firms who are subject to an SRA audit will be investigated as a key risk area. Inadvertently, if we hold client balances without a proper reason to do so, we could also be in breach of Accounts Rule 3.3. This states that you must not use a client account to provide banking facilities to clients or third parties. If we hold on to money without good reason, this is definitely a concern. 

It’s also problematic if we receive money from our clients too far in advance of completion. This will lead to questions such as ‘why have we received the money so early when completion isn’t due imminently?’ or ‘is there a reason the client has paid it or are we holding it to earn interest?’

What’s happening now?

Over the past few years, there’s been an increase in cases where client money has been misappropriated and client accounts used for things other than what they’re intended for, resulting in tribunals and fines. As a consequence, the SRA began a consultation in November 2024 as part of its ongoing review of consumer protection arrangements in the legal sector. 

SRA consultation

Part of the consultation was to investigate if the rules around interest earned on client accounts, or how long firms can hold client money after the end of a case, need changing so they better serve the client’s interest. It also asked if changes are needed in terms of the controls, checks and balances firms are obliged to have in place to protect money held in client accounts. This includes obligations regarding accountants’ reports and certain rules regarding control and oversight of client money. The consultation closed in February 2025. 

One of the SRA’s concerns is that if monies are not returned promptly, the law firm will benefit from earning interest on their residual balances, and if you took part in or read the consultation, then you’ll have got the sense that the SRA is looking to move us to using third-party managed accounts (TPMAs). 

This means that law firms would no longer receive interest on client monies held, and it would be harder, if not impossible, for client money to be misappropriated. Moving in this direction will also benefit the SRA, as it would result in fewer tribunals and reduce the compensation payments the SRA would have to make. Another benefit of this change is it would mean fewer, or even no accountants’ reports, which, if qualified, need to be reviewed by the SRA – meaning less work for the SRA.

Law firm feedback

However, various polls have been taken since the consultation to gauge what law firms think of this proposal. An article in Legal Futures reported that a poll of law firms found that they are opposed to the SRA’s idea of stopping them from holding client money. A survey of 100 small to medium-sized enterprises by NatWest found that 96% disagreed with the proposal. In addition:

• 58% said that if they didn’t hold client money, it would reduce the quality of the client experience.
• 16% said it would increase the costs of legal services.
• Nearly nine out of 10 (88%) did not see that TPMAs were a viable alternative.

Definition of “promptly”

The consultation also intimated that the word “promptly” could be replaced with more prescriptive wording, for example that any excess funds should be returned to the client or third party within 12 weeks of the conclusion of the matter. The SRA is also proposing that a further 12 weeks could be added where a client cannot be traced, which gives the firm time to make reasonable attempts to trace the owner of the funds. 

It would also be expected that within these additional 12 weeks, and if the rightful owner cannot be traced, the firm would have time to donate the monies (if under £500) or for balances over £500 apply to the SRA, under rule 5.1(c), to seek approval to donate the money to charity.  

What can we do?

To recap, the Accounts Rules state that we are under an obligation to return client money promptly to the client, or third party for whom it is held, as soon as there’s no longer any proper reason to hold those funds. To my mind, this means at the conclusion of the matter. So, when making the final payment, fee earners should ensure that no funds are left in the client account after all obligations are accounted for. 

Involve the finance team

I’ve worked across several law firms over 30-plus years, and in my experience, all law firms have residual balances. What makes the difference is your process on identifying them, resolving to clear each balance and how you monitor the balances. 

As this is low down on a fee earner’s list of priorities, it’s imperative that your finance team works alongside the legal team. The finance team should run reports that show the balance on the client account and the date of the last movement. On matters identified as having no movement for a significant time, engage with the fee earner and ask what the money is there for, if it can be returned or if there’s a legitimate reason why it’s being held. If the monies are to be returned, then ensure that the fee earner actions this return. 

Report, monitor and keep up to date

For visibility purposes, it’s also advisable to report and monitor how you are progressing with your residual balances. When a client balance is identified as being held for a genuine reason, make a note of it. You can then compare the balances genuinely held against those that are not. Do this on a monthly and yearly basis and then you can monitor that your residual balances are decreasing. This also serves as a good way to demonstrate to your reporting accountant that the work you’re doing is making a difference, that it matters to you, and that you’re not holding on to residual balances to potentially earn interest. 

Having a note of the reason you are holding the client funds also helps at audit time; you have an answer readily available for your accountant when they ask what the funds are being held for. I can’t stress enough that to clear residual balances, it’s imperative that legal and finance teams work together. 

You can ensure that residual balances do not occur by: 

• ensuring any interest due is allocated to the matter 
• before the final payout, checking the ledger and completion statement. Do they match?
• when the matter is nearing completion, obtaining bank account details from your client or the third party that is due the funds, and
• ensuring your contact details are kept up to date across your systems.

Ways to trace clients or third parties

If you don’t have up-to-date contact details for your client or third party who is due the funds, then there are ways you can trace them. A Google search can be useful, especially when searching for a company. You can use the Department for Work and Pensions (DWP) letter-forwarding service: for a small fee the DWP will forward a letter to the address it has on record. 

You can also use public data, such as electoral rolls or social media, while professional directories use websites and databases such as 192.com to find people. For larger sums or for complicated situations, tracing agents have access to private databases and specialised tools to locate individuals.

Firms may withdraw a client balance that’s less than £500 and pay it to a charity of their choice that has an indemnity in place, as long as they have taken reasonable steps to return the money to its rightful owner. Also consider: the age and amount of the residual balance; if the firm has access to the client’s most up-to-date contact details; and if it has taken reasonable steps to trace the client or third party.

If the balance is over £500, then you need to have demonstrated that your firm has completed the above steps, and, if appropriate, engaged with a tracing agent (the cost of which must not be deducted from the client funds), before the money can be donated. The SRA must grant authority to do this. If you are unsuccessful in tracing the client you can then apply to the SRA to transfer the funds to charity.

Is there ever a reason for firms to hold on to client funds?

The answer to this is yes, there are times when a firm can hold client funds for a significant length of time. This is not an exhaustive list but could include:

• retentions
• monies held on trust
• undertakings.

In these instances, it’s crucial to ensure you keep on record the reason why the funds are being held and proof thereof. The finance team is well advised to check in with the fee earners in these instances and make certain they have sufficient evidence to prove that the firm should be holding the monies in the client account and for how long. When is completion expected? Make a note of the date. Continually monitor these balances throughout the year to ensure you’re confident you have covered all bases.

Things to consider

When receiving monies into a client account ensure this doesn’t happen before the funds are truly needed.

At the point of making final payments from a client account, ensure you account for any interest, check completion statements, properly account for disbursements, and – finally – that the last payment you make does not leave any balance in the client account. 

It’s also important to make sure your records are kept up to date: do you have current contact and bank details for the clients who are due the monies, or those of any relevant third parties?

If you consider all the above, then your risk of having to deal with a residual balance in the future is vastly reduced.