Most common SRA Accounts Rules breaches in 2024

As we enter the Solicitors Regulation Authority (SRA) Accounts Rules audit season, we highlight the top five common breaches we identified when undertaking our work last year.

1: Residual balances

Despite being the SRA’s hot topic for several years now, residual client balances continue to be the breach we identify the most when completing our SAR compliance work.

SRA 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.

SRA guidance makes it clear that firms should be looking at dealing with these monies as soon as possible after the matter has concluded or there is no longer any proper reason to hold the funds (for example the matter has been aborted).

Evidence of attempts to resolve is also key, if required, to explain why a balance is still held. Simply writing to a client once a year for bank details and getting no response is not an adequate attempt to resolve the balance. Fee earners need to demonstrate they are actively trying to return the funds and once all avenues have been explored then looking to follow their firm’s procedure for donating the balance to charity.

2: Ledgers not reflecting transactions

SRA Accounts Rule 8.1 states: You keep and maintain accurate, contemporaneous and chronological records.

Given the widespread nature of this rule and what it covers, it is probably best to highlight the main concern that arises when identifying breaches of this nature.

In our experience we identify numerous instances where ledger transactions are posted out of chronological order due to a delay in posting transactions to a client matter and as a result the current balance on the ledger is not readily ascertainable at any given point.

This of course can potentially lead to further issues such as:

The firm cannot always confirm the total client funds held in the client bank account for that individual client at any specific time
The firm cannot always confirm the office balance of the ledger at any specific time. As a result, fee earners are unable to easily keep track of the total costs due as at that date
Subsequent breaches of the rules can occur such as improper withdrawals of client funds (SRA Accounts Rule 5.1) or not transferring funds promptly against costs (SRA Accounts Rule 4.1 and 4.3)

Processing transactions daily should reduce the occurrence of this happening.

3: Available funds not transferred promptly

SRA Accounts Rule 4.1 states: You keep client money separate from money belonging to the authorised body. Furthermore, SRA Accounts Rule 4.2 states: You ensure that you allocate promptly any funds from mixed payments you receive to the correct client account or business account.

Firms must have a time-frame policy in place under Rules 4.1 and 4.3.

Most firms adopted (as their written policy) the previous rule’s ‘within 14 days’ requirement.

Despite firms deciding their own policy, we still identify numerous instances of funds not being transferred within this timeframe. Whilst it might appear, at face value, that this only means the firm is not benefitting from a cashflow standpoint, the SRA view high instances of this as a key risk indicator. This is due to the risk of firms keeping funds in the client account which could be covering shortfalls on other matters.

We recommend that firms perform a review at the end of each week of all outstanding costs notified to clients. They should then check whether funds held in the client account can be transferred against these.

4: Client funds held on office account

SRA Accounts Rule 4.1 states: You keep client money separate from money belonging to the authorised body.

While firms are in the position of defining ‘promptly’ when deciding the time period for transferring monies that should not be held in the business account, our experience is that a policy of one to two working days is typical.

This would seem a reasonable and achievable timeframe to identify any office credit balances and transfer the funds accordingly.

Where issues are still arising, we would recommend running an office credits report. Ideally this would be run daily to identify any potential breaches, investigate as required and resolve immediately.

If an office credits report can’t be produced by the system, then often a system can produce a matter balance list which includes the office balance. This can be exported into excel and filtered to show any office credit balances.

In June 2024, the SRA published their ‘Warning notice: Money missing from client account’. This makes it clear that the requirement under Rule 6.1 to rectify breaches where client money has been improperly withheld (i.e. in the business account) immediately means precisely that. See also point five below.

5: Improper withdrawal of client funds

SRA Accounts Rule 5.1 states: You only withdraw client money from a client account:

For the purpose for which it is being held
Following receipt of instructions from the client, or the third party for whom the money is held, or
On the SRA‘s prior written authorisation or in prescribed circumstances

This is regarded as a serious issue by the SRA, due to the obvious risk posed to client money and the problems arising from any client account shortfalls.

An improper withdrawal of client funds can be due to numerous reasons. Below we have detailed some of the more regularly identified reasons for an improper withdrawal occurring:

Payments made twice in error such as a disbursement or legacy
Funds received posted to an incorrect matter then subsequently paid out
Overpayments such as for a mortgage redemption
Transposition errors when entering bank payments

Generally, the above occurs as a result of human error be it not checking the latest mortgage statement or working from a draft set of estate accounts/ completion statements rather than a final one. As a result, it may just be a case that more care could be taken prior to a payment being initiated.

The warning notice referred to a point four above, also applies to client money ‘improperly withdrawn’.

We have produced a useful guide to assist fee earners and finance teams in navigating Rule 3.3.