Client Money and Client Accounts
Solicitors Accounts > Client Money and Client Accounts
Most SQE1 candidates misclassify mixed payments or fail to recognize that money on account of costs remains client money until the firm delivers a bill. These classification errors cascade through the rest of the question.
What Is Client Money and Client Accounts in SQE1?
Client Money and Client Accounts is the foundational topic for Solicitors Accounts. This covers the definition of client money (money held by the firm in connection with a client's matter or as trustee, which is not the firm's own money) and the mandatory requirement to hold it separately in a client account. You need to understand what counts as client money (purchase price, deposits, money on account of costs before billing) and what does not (fees properly billed, money the firm owns). You also need to grasp the mixed payments rule: if the firm receives a cheque containing both client money and payment for the firm's costs, the entire amount must go into the client account first, then the firm's portion is transferred out when billed. For SQE1, classification errors are the most common mistake in this area.
Key Principles for SQE1
- Definition of client money (Rule 2.1): Money held by the firm in connection with a client's matter or as trustee, which is not the firm's own money. Key trigger: did the firm receive it for the client's benefit or to hold for a specific purpose?
- Prompt payment into client account (Rule 2.3): Client money must be paid into the client account on the day of receipt or next working day. Holding it in the business account is a breach.
- Client account must be separate: A client account is a bank or building society account held in the firm's name and designated as a client account, segregated from business money.
- Mixed payments rule: If a cheque contains both client money and payment for the firm's costs, the entire sum goes into the client account first. The firm's portion is only transferred out when a bill is delivered.
- Duty to return client money promptly (Rule 2.5): When there is no longer a proper reason to hold client money, it must be returned to the client promptly.
How This Appears in SQE1 Questions
SQE1 questions typically present a scenario and ask you to identify whether a particular sum is client money, which account it should be paid into, or whether the firm has acted correctly. The critical trap is misclassifying money - for example, treating a payment on account of costs as client money when the firm has already delivered a bill, or vice versa. Questions also test the mixed payments rule and the timing of receipt.
Quick Example Scenario
A firm receives a cheque for £15,000 from a client. Of this, £10,000 is a payment towards the purchase price of a property (client money) and £5,000 is a payment on account of the firm's agreed fees. The firm has not yet delivered a bill. The entire £15,000 should be paid into the client account because the payment is mixed. The £5,000 on account of costs is still client money until the firm has delivered a bill and properly transferred its costs from the client account to the business account. Once billed, the firm can transfer the £5,000 out of the client account.
Common Mistakes Students Make
- Failing to identify mixed payments - the entire sum should go into the client account first, then the firm's portion is transferred out.
- Confusing payments on account of costs (client money until billed) with billed costs (the firm's own money once properly invoiced).
- Not understanding the 'promptly' requirement - client money should be banked on the day of receipt or the next working day.
- Forgetting the duty to return client money when there is no longer a proper reason to hold it.
Exam tip
- The most common SQE1 trap is mixed payments — the entire sum goes into the client account first, then the firm's portion is transferred out. Never split at the point of receipt.
Quick Summary
- Rule 2.1: client money is money held or received by firm in connection with client's matter or as trustee, which is not the firm's own money
- Rule 2.3: client money must be paid into client account promptly (on day of receipt or next working day - not held in business account)
- Client account: a bank or building society account held in name of firm and designated as client account; must be at bank/building society in England and Wales
- Rule 4.1: client money must be kept separate from firm's own money; firm must not use client money for its own purposes
- What is NOT client money: payments properly billed for firm's costs (once bill delivered), money belonging to firm, money held in non-client capacity (e.g., firm is party to transaction)
- Mixed payments: entire sum should be paid into client account; firm's portion should be promptly transferred out to business account
- Third-party managed accounts (TPMAs): alternative to firm's client account - TPMA managed by third-party provider; firm does not hold money directly (Rule 11)
- Rule 2.5: client money must be returned to client promptly when there is no longer proper reason to hold it
- Client account cannot be used to provide banking facilities for client's personal debts unrelated to legal matter
Want to test this now? Try a few SQE1-style questions below before moving on.
Test Yourself
Test yourself
Quick check questions based on this article.
Question 1
Scenario
A solicitor acts for a client in a debt recovery matter. The client is owed £18,000 by a debtor. The debtor's solicitor contacts the firm and offers to settle the debt for £12,000 in full and final settlement. The client instructs the solicitor to accept the settlement. The debtor's solicitor sends a cheque for £12,000 payable to the firm. The solicitor pays the cheque into the client account. The firm's outstanding fees on the matter are £3,600 plus VAT of £720, totalling £4,320. The solicitor has delivered a bill to the client for this amount. Before transferring the settlement balance to the client, the solicitor receives a telephone call from a different client whose matter is handled by the same solicitor. This second client is in urgent need of £5,000 from the client account to pay a court fee, but the second client's ledger shows a nil balance. The solicitor considers temporarily using £5,000 from the first client's ledger to cover the second client's court fee, intending to replace the money when the second client's funds arrive the following day.
Which of the following best describes the solicitor's position in relation to the proposed use of the first client's money?
Question 2
Scenario
A solicitor acts for a client in a personal injury claim that settles for £45,000. The defendant's insurer pays the settlement sum directly into the firm's client account. The solicitor delivers a final bill to the client for £6,000 plus VAT at 20%, totalling £7,200. The solicitor transfers £7,200 from the client account to the business account in payment of the bill. The client ledger now shows a balance of £37,800 in the client account. The solicitor writes to the client confirming the settlement, enclosing the final bill, and stating that the balance of £37,800 will be sent to the client within 14 working days. The client responds by email the next day asking for immediate payment. The firm's finance officer tells the solicitor that it would be more convenient to process the payment at the end of the month, which is 18 working days away. The finance officer explains that the firm processes client account payments in batches to reduce administrative costs. The solicitor is also holding a small residual balance of £25 on the client ledger from an earlier unrelated matter for the same client. That matter concluded six months ago, and the client has not requested the return of the £25.
What is the firm's obligation regarding the return of the £37,800 and the £25?
Question 3
Scenario
A newly qualified solicitor joins a small high street firm. The firm operates a single bank account for all of its financial transactions, including client money and the firm's own income. The firm's senior partner explains that this is a longstanding arrangement and that the firm has always kept careful internal records to distinguish between client money and office money. The solicitor notes that the bank account is named in the firm's own name without any reference to it being a client account. The senior partner shows the solicitor a detailed spreadsheet that tracks which portion of the account balance relates to client money and which relates to the firm's money. The solicitor has concerns about this arrangement. The firm has been operating in this manner for over fifteen years without any complaint. The senior partner has been a solicitor for thirty years. The firm has eight active client matters. The firm recently passed a routine check by its accountant. The senior partner reassures the solicitor that the arrangement is adequate.
Is the firm's current arrangement compliant with the SRA Accounts Rules?
Practice with full exam-style questions
Related Topics
- SQE1 Solicitors Accounts: Complete Guide
- Accounting Records and Bookkeeping
- Special Client Account Arrangements
Practise Client Money and Client Accounts Questions for SQE1
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