SRA Accounts Rules: Client Money, Reconciliations and the Accountant’s Report

The SRA Accounts Rules are short — a fraction of the length of the regime they replaced — and that brevity is the problem. Where the old rules told firms exactly what to do, the current ones set outcomes and leave the method to the firm. This guide sets out what the rules actually require, with the rule numbers, so a compliance officer can check their own procedures against them.

This guide is the operational one: the five-week reconciliation and residual-balance rules, interest, and the accountant’s report. If you want the underlying principles instead — segregation, the COFA’s role, breach reporting and the separate Irish regime — start with SRA Accounts Rules and client money controls explained.

When the rules apply, and to whom

The current version of the SRA Accounts Rules has been in effect since 25 November 2019. They apply to authorised bodies, their managers and their employees (Rule 1.1), and — importantly for partnership structures — managers are jointly and severally responsible for compliance (Rule 1.2). That is not a technicality. It means a compliance failure in the accounts function is not confined to whoever runs the accounts function.

What counts as client money

Rule 2.1 defines client money as money held or received by the firm falling into four categories:

• money relating to regulated services delivered to a client;
• money held for a third party, such as an agent or stakeholder;
• money held as a trustee or under a specified office, such as a power of attorney;
• the firm’s own fees and unpaid disbursements, where held before a bill is delivered.

The fourth category is where firms most often get caught out. Money on account of costs is client money until a bill is delivered. Rule 2.2 provides a narrow relief: where that is the only client money the firm holds, and the client has been told in advance where it will be held, it need not sit in a client account. That relief is the basis of most no-client-account models, and it collapses the moment any other category of client money arrives.

Rule 2.3 requires client money to be paid promptly into a client account, subject to listed exceptions. Rules 2.4 and 2.5 require it to be available on demand and returned promptly once there is no longer a proper reason to hold it.

Where it is held, and what a client account cannot be used for

Rule 3 requires client accounts to be kept at a branch or head office of a bank or building society in England and Wales, and the account name must include both the authorised body’s name and the word “client”. The same rule prohibits using a client account to provide banking facilities — the point on which a substantial share of SRA enforcement action turns, because moving money through a client account for a client’s convenience is a breach even where nothing is lost and everyone is honest.

Rule 4 requires client money to be kept separate from the firm’s own money, with mixed payments allocated promptly (4.2). Costs may be taken from client money only after a bill or written notification has been given, and then only for the specific sum it covers (4.3).

Rule 5 governs withdrawals: permitted only for the purpose for which the money is held, on instructions, or with SRA authorisation or in prescribed circumstances (5.1); appropriately authorised and supervised (5.2); and covered by sufficient funds held for that specific client (5.3). That last point rules out one client’s money temporarily funding another’s transaction.

The five-week rules — the operational heart of the regime

If a firm gets only one thing right, it should be Rule 8. Two obligations run on a five-week clock:

• Rule 8.2 — obtain bank and building society statements at least every five weeks, for all client and business accounts.
• Rule 8.3 — complete a reconciliation at least every five weeks for all client accounts, comparing the statement balance against the cash book balance and the total of the client ledger. The record must be signed off by the COFA or a manager of the firm, and any differences promptly investigated and resolved.

Three things are worth drawing out. The interval is five weeks, not monthly — a firm reconciling on the last working day of each month can drift past five weeks across a long month and a bank holiday. The reconciliation is a three-way comparison, not a bank-to-cashbook check. And the sign-off must be by a named person with authority, which means it cannot be delegated downwards to whoever prepared it.

Rule 8.1 requires accurate, contemporaneous and chronological records, including client ledgers, a list of client balances with a running total, and a cash book. Rule 8.4 requires a readily accessible central record of all bills and costs notifications. Under Rule 13.1, accounting records must be stored securely and retained for at least six years.

Rule 6.1 deals with what happens when something goes wrong: breaches must be corrected promptly upon discovery, and money improperly withheld or withdrawn replaced immediately. Prompt correction is itself part of compliance; a breach found and fixed is in a different category from one found by somebody else.

Interest

Rule 7.1 requires the firm to account to clients or third parties for a fair sum of interest on client money held. Rule 7.2 permits a different arrangement by written agreement, provided the client has been given sufficient information to give informed consent. A policy that has not been revisited through a period of changing interest rates is unlikely to satisfy “fair” on its own terms.

The accountant’s report, and when you do not need one

Under Rule 12.1(a), a firm that held or received client money during an accounting period must obtain an accountant’s report within six months of the end of that period. Under 12.1(b), the report must be delivered to the SRA within the same six months if it is qualified to show a failure to comply that places client or third-party money at risk. Note the distinction: every firm holding client money obtains a report; only qualified reports of that kind are filed.

Rule 12.2 sets out when no report is required at all. Either all client money in the period came from the Legal Aid Agency, or the statement balance did not exceed an average of £10,000 and a maximum of £250,000 (or the foreign-currency equivalent). Rule 12.3 defines the statement balance as the total across client accounts and any joint or client’s own accounts the firm operates, taken from the statements obtained under 8.2.

The report must be prepared and signed by an accountant who is a member of one of the chartered accountancy bodies and who is, or works for, a registered auditor (Rule 12.5). The SRA may disqualify an accountant for professional misconduct or a failure to exercise due care and skill (12.6), may specify engagement terms, and requires the report in a prescribed form.

Where firms actually fail

The rules are outcomes-based, so the common failures are rarely dishonesty. They are procedural:

• The five-week clock slipping, usually because a monthly routine was assumed to satisfy it.
• Sign-off by the preparer rather than the COFA or a manager, which fails 8.3 even where the reconciliation itself is perfect.
• Banking facilities — payments passing through client account that have no connection to a regulated service being delivered.
• Costs taken before a bill or notification, breaching 4.3 by days rather than by intent.
• Residual balances left in place with no proper reason to hold them, which engages 2.5.
• Records not retained for six years, often after a system migration.

Every one of those is a training and supervision failure before it is an accounts failure, which is why the Accounts Rules sit inside a firm’s wider competence obligations rather than beside them. The SRA’s framework for that is set out in our guide to SRA continuing competence, and the related supervision expectations in effective supervision in legal practice.

How this connects to the firm’s other compliance obligations

Client money is also where anti-money laundering risk concentrates, because it is the point at which funds enter the firm. The source-of-funds and due-diligence work that sits behind a client account receipt is covered in our guides to AML training requirements for solicitors and law firms and undertakings, risk and compliance. Firms should also note that AML supervision for law firms is moving to the FCA on a phased timetable — the detail is in that AML guide — which will put the same accounts and training records in front of a supervisor with no prior relationship with the firm.

A note on the rules themselves: the SRA’s published text numbers some of the later rules inconsistently, so when citing a rule in correspondence it is worth quoting the wording alongside the number.

Learnsignal’s CPD courses cover financial crime, ethics and governance for professional services firms, and our legal CPD guide covers the wider requirements across Ireland and the UK.