Every solicitor in England and Wales who handles client money must understand the precise definition of what counts as client money under the SRA Accounts Rules. Get this wrong, and you risk a breach report to the SRA, a qualified accountant's report, or worse, a referral to the Solicitors Disciplinary Tribunal.
This guide explains the SRA's client money definition, the scope of the SAR (Solicitors Accounts Rules), and the practical tests you need to apply when deciding whether a receipt is client money or firm money. We use real examples from conveyancing, litigation, and probate work to illustrate the boundary.
The Core Definition of Client Money Under the SRA Accounts Rules
The SRA Accounts Rules (version effective 25 November 2019, as amended) define client money in Rule 2.1 as money held or received by a solicitor in connection with their practice that is:
- Money held or received on behalf of a client; or
- Money held to order (i.e., money that the solicitor is required to account for to a third party); or
- Money held as a stakeholder; or
- Money held in a client's own name but under the solicitor's control.
The critical phrase is "held or received on behalf of a client." This is broader than simply "belonging to the client." It includes money that the solicitor controls, even if the beneficial ownership sits with a third party.
The "Money Held to Order" Test
One of the most misunderstood aspects of the client money definition is the concept of money held to order. This arises when a solicitor receives money that must be accounted for to someone else, typically a third party such as a lender, a landlord, or another professional.
Example: A conveyancing solicitor receives a buyer's deposit of £50,000. The deposit belongs to the buyer until completion, but the solicitor holds it to the order of the seller's solicitor (as stakeholder). This is client money, even though the ultimate recipient is not the solicitor's own client.
The test is straightforward: if you are required to pay the money to someone else (whether your client or a third party) at some point in the future, it is likely client money. The only exception is money that is properly treated as firm money under the SRA Accounts Rules (discussed below).
What Is Not Client Money? The Firm Money Exceptions
Not every receipt into a solicitor's bank account is client money. The SRA Accounts Rules list specific categories of money that are firm money, meaning they belong to the practice and must be paid into the office account (or business account).
The key firm money categories include:
- Money received for or towards payment of a solicitor's fees (including disbursements already paid by the firm).
- Money received in repayment of a loan made by the firm to a client.
- Money received as a payment on account of costs (but only if the client has agreed in writing that it can be treated as firm money).
- Money received from a client that is clearly and unequivocally the firm's own money (e.g., a cheque made payable to the firm for fees).
- Interest earned on client money that the firm is entitled to retain under its policy (provided the policy complies with the SRA's "fair" test).
Critical point: If you receive a payment on account of costs from a client, you cannot simply treat it as firm money unless the client has given written consent. Many solicitors fall into the trap of assuming all receipts are client money. The reverse is also true: some solicitors incorrectly treat all receipts as firm money, which is a breach of the SRA Accounts Rules.
Practical Examples: Applying the Client Money Definition
Example 1: Conveyancing Deposit
Your firm acts for a buyer purchasing a property for £300,000. The buyer transfers £30,000 as a deposit to your client account. This is clearly client money. It is held on behalf of the buyer and, until completion, is held to the order of the seller's solicitor as stakeholder. After completion, the deposit becomes the seller's money, but it remains client money in your hands until you transfer it to the seller's solicitor.
Example 2: Litigation Settlement Funds
You act for a claimant in a personal injury claim. The defendant's insurer pays £100,000 into your client account as a settlement. This is client money. You must hold it until you have accounted to your client for the net proceeds after your costs and disbursements. The entire £100,000 is client money, even though part of it will ultimately become your firm's fees.
Example 3: Probate Receipts
You are the executor of an estate. The estate's bank account is closed, and the bank sends a cheque for £50,000 made payable to "Your Firm, Executors of the Estate of John Smith." This is client money. It is held on behalf of the estate beneficiaries. You must pay it into your client account, not your office account.
Example 4: Payment on Account of Costs
A new client pays £2,000 into your office account as a payment on account of costs. You have not obtained the client's written agreement to treat this as firm money. This is a breach. The £2,000 should have been paid into the client account until you have rendered a bill and the client has agreed to the transfer.
The Scope of the SAR (Solicitors Accounts Rules)
The SRA Accounts Rules apply to all SRA-regulated firms, including sole practitioners, partnerships, LLPs, and ABSs. The scope of the SAR covers every aspect of how client money is handled, from receipt to payment to reconciliation.
Key rules within the SAR scope include:
- Rule 2.1: The definition of client money (discussed above).
- Rule 3.1: Client money must be paid promptly into a client account (with limited exceptions).
- Rule 4.1: Client money must be held in a bank account designated as a client account.
- Rule 5.1: Client money must be kept separate from firm money.
- Rule 8.3: Client account reconciliations must be carried out at least every five weeks.
- Rule 12.1: An accountant's report must be delivered to the SRA annually unless the firm qualifies for the de minimis exemption.
The SAR scope is not limited to money held in the client account. It also covers money held in the office account that should have been in the client account, and money held in third-party accounts (e.g., a stakeholder account) that is under the solicitor's control.
Common Pitfalls: When Is Money Not Client Money?
Several situations cause confusion among solicitors. Here are the most common pitfalls:
Pitfall 1: Treating All Receipts as Client Money
Some firms adopt a "belt and braces" approach and pay every receipt into the client account. This is not a breach per se, but it creates unnecessary administrative work and can cause problems when the firm needs to access its own funds. More importantly, if you pay firm money into the client account, you must transfer it out promptly once you identify it. Holding firm money in the client account for an extended period is a breach of Rule 5.1.
Pitfall 2: Treating All Receipts as Firm Money
The opposite mistake is more dangerous. If you pay client money into the office account, you have breached Rule 3.1. This is a serious breach that must be reported to the SRA. The only exception is if the client money is received by cheque made payable to the firm and you have the client's written authority to treat it as firm money (e.g., for payment on account of costs).
Pitfall 3: Confusing "Client Money" with "Client's Money"
Client money does not have to belong to the client. Money held to order of a third party (e.g., a lender's funds for a property purchase) is still client money. The SRA definition focuses on the solicitor's relationship with the money, not the beneficial ownership.
Pitfall 4: Failing to Identify Client Money in Electronic Transfers
When you receive a bank transfer, the reference may not always make clear whether it is client money or firm money. If in doubt, treat it as client money until you can confirm otherwise. A common scenario is a client paying an invoice by bank transfer but also including additional funds for a future disbursement. The entire amount should go into the client account until you can split it correctly.
Client Money and the SRA Accountant's Report
Every SRA-regulated firm must deliver an annual accountant's report to the SRA unless it qualifies for the de minimis exemption. The exemption applies if the firm held no more than £10,000 of client money at any time during the accounting period AND the average client money balance did not exceed £250.
For firms that do hold client money, the accountant's report tests compliance with the SRA Accounts Rules. The accountant will review your client account reconciliations, sample transactions, and the overall control environment. If the accountant identifies breaches, they must report them to the SRA.
If you are unsure whether your firm qualifies for the exemption, speak to a solicitor accountant who specialises in SRA compliance.
Practical Steps for Solicitors
To ensure you correctly identify client money, follow these steps:
- Train all fee-earners and accounts staff on the client money definition. Every person who handles money in your firm should understand the difference between client money and firm money.
- Use a clear decision tree. When a receipt arrives, ask: "Is this money held on behalf of a client? Is it held to order of a third party? Is it stakeholder money? Is it under my control for a client matter?" If the answer to any is yes, it is client money.
- Document your decisions. If you receive a payment that is borderline, record why you treated it as client money or firm money. This protects you if the SRA or your accountant queries it later.
- Review your client account regularly. Reconciliations every five weeks are mandatory, but monthly reconciliations are better practice. Use the SRA client account reserve calculator to check your balances.
- Get specialist advice. If you are unsure about a specific receipt, ask your COFA or your COFA compliance support provider. Do not guess.
Conclusion
The client money definition under the SRA Accounts Rules is broad but clear. Money held or received on behalf of a client, money held to order, stakeholder money, and money under your control for a client matter all count as client money. The exceptions are narrow and require specific conditions to be met.
Getting this wrong can have serious consequences, from a qualified accountant's report to SRA intervention. Every solicitor in your firm should understand the definition and apply it consistently.
If you need help reviewing your firm's client money handling procedures, contact our team of solicitor accountants. We specialise in SRA compliance and can help you avoid costly mistakes.