SQE1 Solicitors Accounts

Solicitors Accounts · Client money: stakeholder deposit

The firm acts for Mr and Mrs Roy in the sale of their house. Contracts are exchanged and the buyer's solicitor pays the 10% deposit of £30,000 to the firm. The contract provides that the firm holds the deposit as stakeholder until completion. A trainee asks whether the £30,000 is client money and where it should be held. What is the correct answer?

1. It is client money because it is held on behalf of a third party as stakeholder, so it goes promptly into a client account.
2. It is not client money until completion, so it may be held in the business account until the transfer is made.
3. It is client money only if the Roys give written instructions, so it stays in the business account until then.
4. It is client money, but the firm may keep it in the business account if the buyer's solicitor agrees to that.
5. It is client money only after the Roys have received the proceeds, and until then it belongs to the buyer.

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Answer: A. Under the SRA Accounts Rules, rule 2.1, client money includes money held or received on behalf of a third party, such as money held as agent, stakeholder or to the sender's order. Money held as stakeholder is therefore client money, even though it does not yet belong to the Roys. Rule 2.3 requires client money to be paid promptly into a client account, and rule 4.1 requires it to be kept separate from the firm's own money. The money must stay in the client account until completion, when it is released under the contract. The tempting answer is that the money is not client money until it is released, but rule 2.1(b) refers to money held on behalf of a third party, which covers it from receipt.

SRA Accounts Rules, rules 2.1, 2.3 and 4.1

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Solicitors Accounts · Client money: unpaid disbursements

Kemi Adeyinka is buying a flat through the firm. Before any bill has been sent, she pays £850 on account towards the search fees, Land Registry fee and other expenses that the firm will pay for her. The firm's cashier suggests paying the £850 into the business account, because the firm will use it to pay these costs and because the firm is entitled to payment of its own disbursements. How should the money be treated?

1. As business money, since the firm is liable to the search providers and the payment is for the firm's own costs.
2. As business money until the first search fee is paid, and then as client money for the rest.
3. As client money, because money held for unpaid disbursements before a bill is delivered is client money.
4. As client money only if Kemi has told the firm in writing that it is to be held in a client account.
5. As business money, since disbursements are never client money once the client has paid them to the firm.

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Answer: C. Rule 2.1(d) of the SRA Accounts Rules defines client money to include money held or received in respect of the firm's fees and unpaid disbursements if it is held or received before a bill for them is delivered. Kemi's £850 was paid before any bill, so it is client money. It must be paid promptly into a client account (rule 2.3) and used only for the purpose for which it is held (rule 5.1). Rule 2.2 allows such money to be kept in the business account only where it is the only client money the firm holds, the disbursements are ones the firm is liable for, and the client has been told in advance where and how the money will be held. This firm runs a client account for conveyancing clients, so that exception does not apply. The firm's liability to the suppliers does not make the money the firm's own.

SRA Accounts Rules, rules 2.1(d), 2.2, 2.3 and 5.1

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Solicitors Accounts · Business money: payment of a delivered bill

On Monday the firm sent Mr Grant a bill for £1,800, made up of £1,500 profit costs and £300 VAT, for work on the completed sale of his house. On Thursday, he pays the bill in full by bank transfer. There are no other sums for him or his matter. The firm's accounts clerk asks whether the £1,800 can be paid into the business account. What is the correct answer?

1. Yes, because the payment settles a bill already delivered and so it is not client money.
2. No, because every payment received from a client is client money until the file is closed.
3. No, because the payment must first go into the client account and then be transferred after seven days.
4. Yes, but only after the firm has obtained a written authority from Mr Grant to bank the money.
5. No, because VAT charged on a bill is always client money until it is paid over to HMRC.

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Answer: A. Rule 2.1(d) makes money for fees and unpaid disbursements client money only if it is held or received before a bill is delivered. Once the bill has been delivered, a payment of that bill is the firm's own money, not client money. Mr Grant paid after delivery, so the £1,800 is business money and should go into the business account. Paying it into the client account would breach rule 4.1 (client money must be kept separate from the firm's money) unless corrected promptly. There is no seven-day period, and no authority is needed to bank the firm's own fees. The VAT is part of the bill and, once paid, is the firm's money, to be accounted for to HMRC in the usual way as part of the firm's VAT return.

SRA Accounts Rules, rules 2.1(d) and 4.1

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Solicitors Accounts · Mixed payments

Dr Okonkwo sends the firm one cheque for £14,000. It is made up of £2,400 to pay a bill the firm delivered last month for a completed matter, and £11,600 that he wants held as a deposit for a house he is buying through the firm. The cheque cannot be split. What does the SRA Accounts Rules, rule 4.2, require the firm to do?

1. Pay the cheque into the business account, since the firm is owed part of it, and keep all of it until completion.
2. Hold the whole £14,000 as client money until the purchase completes, even though £2,400 is the firm's fee.
3. Pay the cheque into the client account, since most of it is client money, and leave the £2,400 there as a cushion.
4. Return the cheque to Dr Okonkwo, because the firm may not accept a payment that is partly client money.
5. Allocate the money promptly so that £11,600 is held as client money and £2,400 is moved to the business account.

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Answer: E. A mixed payment is a payment that includes both client money and other money. Rule 4.2 requires the firm to ensure that funds from mixed payments are allocated promptly to the correct client account or business account. Here £11,600 is client money (a deposit held for the client) and £2,400 is the firm's money (payment of a delivered bill). The firm should allocate them promptly, so that the client's deposit is protected and the fee is not left in the client account. Leaving the firm's £2,400 in the client account would breach the rule that client money must be kept separate (rule 4.1). A mixed payment is not forbidden, and the firm need not return the cheque.

SRA Accounts Rules, rules 4.1 and 4.2

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Solicitors Accounts · Banking facilities

A long-standing client, Mr Zahid, asks the firm to receive £120,000 from his business partner into the firm's client account and, two days later, to pay the money to a supplier in another country. He says there is no property transaction or other legal work, and he will pay the firm a £500 fee for helping. The fee earner thinks the request is harmless, since the money will be in the client account for only two days. What should the fee earner do?

1. Accept, because the money will be held only briefly and Mr Zahid will pay a fee.
2. Accept, because Mr Zahid has given clear written instructions and the firm has acted for him before.
3. Accept, but only if the partner who supervises the matter has approved the transfer in writing.
4. Decline, but only if the sum exceeds the limit the firm sets for payments through its client account.
5. Decline, because the client account must not be used to provide banking facilities, and the request is a money laundering warning sign.

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Answer: E. Rule 3.3 of the SRA Accounts Rules says that a firm must not use a client account to provide banking facilities to clients or third parties. Payments into and out of the account must be in respect of regulated services the firm is delivering. Here there is no underlying legal work, so the firm would be acting as a bank. Duration, a fee and the client's instructions do not change this. The request is also a classic money laundering red flag, since funds move through the account with no legal purpose, and the firm must consider whether to make an internal report. The firm must also safeguard money entrusted to it (SRA Code of Conduct for Solicitors, para 4.2), and passing it on to a third party without a legitimate purpose would risk breaching it.

SRA Accounts Rules, rule 3.3; SRA Code of Conduct for Solicitors, para 4.2

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Solicitors Accounts · Transfers from client account to pay costs

The firm acted for Mrs Patel on the sale of her house, and holds £7,000 of her proceeds in the client account. The supervising partner's unbilled costs are about £2,500. The partner tells the cashier to transfer £2,500 to the business account today, to help the firm's cash flow, and says the bill will be sent after the month-end. The matter is complete and Mrs Patel is happy with the service. May the transfer be made?

1. Yes, because the matter is complete and the firm is clearly owed its costs.
2. Yes, because the transfer is recorded in the client ledger and the cash book.
3. Yes, if Mrs Patel agrees verbally by telephone and a note of the call is made.
4. No, because a bill of costs or other written notification of costs must be given before client money is used to pay costs.
5. No, because costs may be paid from client money only once the client has paid them to the firm by cheque.

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Answer: D. Under rule 4.3 of the SRA Accounts Rules, before the firm uses client money to pay its costs, it must give the client a bill of costs or other written notification of the costs, and the transfer must be for the specific sum identified. The partner proposes to move £2,500 first and send the bill later, which reverses the order required. The firm also needs to be able to show that the amount held covers the transfer. The firm's cash flow needs or the client's goodwill do not change this. Recording the transfer in the ledgers is required (rule 8.1), but it does not make an otherwise improper transfer permissible. An oral agreement is not a written notification.

SRA Accounts Rules, rules 4.3 and 8.1

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Solicitors Accounts · Withdrawals: sufficient funds for the client

On completion of Mr Lowe's purchase, £250,000 must be sent. His client ledger shows £235,000 because a bank transfer from his savings is delayed until the next day. The cashier proposes to send the full £250,000 by using £15,000 from the client ledger of Ms Singh, whose £60,000 sale proceeds are awaiting instructions, and to replace the £15,000 tomorrow when Mr Lowe's money arrives. The partner sees no harm, since Ms Singh will lose nothing. Is the plan permitted?

1. Yes, because both ledgers are held in the same client account and the money is replaced the next day.
2. Yes, if the partner approves the transfer and the cashier records an internal note of it.
3. No, because money may be withdrawn for a client only if sufficient funds are held for that specific client, and the shortfall is a breach to be corrected.
4. No, but the firm may do this with Ms Singh's money if it pays her interest for the day.
5. No, because the firm can never complete a purchase until all of the buyer's money has been cleared.

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Answer: C. Rule 5.3 of the SRA Accounts Rules says that money may be withdrawn from a client account only if sufficient funds are held on behalf of that specific client or third party. Using Ms Singh's money to fund Mr Lowe's completion would be a withdrawal for a client whose own funds are insufficient, and it would use one client's money for another client's purpose (rule 5.1). It does not matter that Ms Singh loses nothing, that both ledgers are in one bank account, or that the money is replaced the next day. If a shortfall arises, the firm must put it right by paying its own money in immediately (rule 6.1). Using one client's money for another also fails the duty to safeguard money entrusted to the firm (Code of Conduct for Solicitors, para 4.2), and partner approval cannot authorise a breach.

SRA Accounts Rules, rules 5.1, 5.3 and 6.1; SRA Code of Conduct for Solicitors, para 4.2

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Solicitors Accounts · Breaches: correction of an accounts error

On Friday, the firm's reconciliation shows that, six weeks earlier, the cashier paid £4,200 from client A's ledger to a supplier owed by client B. The error was noticed only now. Client A's matter has not yet completed, no payment has been due from the ledger, and A has suffered no loss and has not complained. The partner proposes to correct the position next month, once the supplier repays the money. What does the SRA Accounts Rules, rule 6.1, require?

1. The firm must replace the £4,200 in the client account immediately on discovery, from its own money, and not wait for the supplier.
2. The firm may wait for the supplier to repay, because rule 6.1 applies only if the client suffers a loss.
3. The firm must wait until the next reconciliation, which will confirm the amount of the shortfall.
4. The firm must replace the money only if client A asks for it, as the client is the person affected.
5. The firm must report the error to the SRA first and replace the money only when the SRA allows it.

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Answer: A. Rule 6.1 requires a firm to correct a breach of the Accounts Rules promptly on discovery, and any money improperly withdrawn from the client account must be immediately paid back in or replaced. This is a duty owed whether or not the client has noticed or suffered a loss, because client A's ledger must hold what it should. The firm must use its own money, and the partner's plan to wait for the supplier would leave A's ledger short in the meantime. The firm should also consider whether the error is serious enough to require a report to the SRA (Code of Conduct for Solicitors, para 7.7), but reporting does not delay the duty to replace.

SRA Accounts Rules, rule 6.1; SRA Code of Conduct for Solicitors, para 7.7

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Solicitors Accounts · Interest on client money

The firm acts for the executors of Mr Dube's estate and holds £180,000 of estate funds in a general client account for eight months while a property is sold. The account pays no interest. The executors complain that the estate has had no interest. The firm's written policy says it pays interest only if the sum due would exceed £500, and the estate's interest at ordinary rates would be well above that. The executors never agreed anything about interest. What is the correct position?

1. No interest is due, because interest on a general client account always belongs to the firm.
2. The firm must pay interest at the bank base rate, which the Accounts Rules prescribe.
3. The firm must pay a fair sum of interest, and its policy is no defence if the result is not fair to the executors.
4. The firm must pay interest only for the last four months, which is the period the rules treat as long-term holding.
5. The firm must pay interest only if the executors make a written demand for it within 28 days.

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Answer: C. Rule 7.1 of the SRA Accounts Rules requires a firm to account to clients or third parties for a fair sum of interest on any client money held. The rules prescribe no rate and no minimum period. What is fair depends on the amount, how long the money is held and the rates available. A firm may agree a different arrangement in writing with the client, provided the client has enough information to give informed consent (rule 7.2), but here nothing was agreed. A policy that results in no interest on £180,000 over eight months is unlikely to be fair, so the firm should pay a fair sum, or place the money in a separate interest-bearing account if appropriate.

SRA Accounts Rules, rules 7.1 and 7.2

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Solicitors Accounts · Reconciliation

At a compliance meeting, a newly appointed manager says that the firm's client account is reconciled every quarter by the cashier, who signs the record herself. The last reconciliation was nine weeks ago. The manager asks what the SRA Accounts Rules require. Which of the following is correct?

1. Reconciliation at least every five weeks, comparing the cash book, client ledgers and bank statements, signed off by the COFA or a manager.
2. Reconciliation every quarter is enough, provided the cashier signs the record and the accountant checks it each year.
3. Reconciliation monthly, by the cashier, with sign-off required only if a difference is found.
4. Reconciliation only at the end of the accounting period, when the accountant prepares the annual report.
5. Reconciliation every five weeks, but by the firm's external accountant and not by anyone in the firm.

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Answer: A. Rule 8.3 of the SRA Accounts Rules requires the firm to reconcile its client accounts at least every five weeks, comparing the cash book and ledger totals with the bank or building society statements obtained under rule 8.2. The reconciliation record must be signed off by the COFA or a manager, and any differences must be investigated and resolved promptly. A quarterly reconciliation signed only by the cashier does not meet the rule. The annual accountant's report (where one is required) is separate and does not replace the five-weekly check. The reconciliation is an internal control, so the firm's own staff do it, with sign-off by a manager or the COFA.

SRA Accounts Rules, rules 8.2 and 8.3

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Solicitors Accounts · Accountant's report

A small firm held client money throughout its last accounting year. Its bank statements show that the client account balance averaged £8,500 over the year, and the highest balance was £310,000, on a completion day. The firm received no payments from the Legal Aid Agency. For this question, assume that a firm is exempt from the accountant's report only if the average balance did not exceed £10,000 and the highest balance did not exceed £250,000. What must the firm do?

1. Obtain an accountant's report within six months of the end of the accounting period, because the highest balance exceeded the limit.
2. Nothing, because the average balance was below £10,000, and that alone gives the exemption.
3. Obtain an accountant's report only if the SRA asks for one, since it is the SRA that decides when one is needed.
4. Obtain an accountant's report within 12 months, and always send a copy to the SRA.
5. Obtain a report only if a manager or the COFA suspects that client money has been put at risk.

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Answer: A. Under rule 12.1 of the SRA Accounts Rules, 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, unless an exemption applies. Under rule 12.2, as set out in the question, the exemption needs both an average balance not above £10,000 and a highest balance not above £250,000. The firm's average was low enough, but its highest balance of £310,000 was too high, so no exemption applies. The report need be delivered to the SRA only if it is qualified in a way that indicates client money is at risk. The tempting view that a low average is enough treats the two limits as alternatives, but both must be met.

SRA Accounts Rules, rules 12.1 and 12.2

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Solicitors Accounts · Accounting records

A newly qualified solicitor is asked to check that the firm's client account records are properly kept. A colleague says that a running cash book of client account movements is enough, and that the firm may destroy its accounting records after three years. Which of the following correctly states the SRA Accounts Rules?

1. Only a cash book is needed, and all records may be destroyed after two years.
2. Client ledgers, a list of client balances and a cash book are needed, and records must be kept for at least three years.
3. Client ledgers, a list of client ledger balances with a current balance shown, and a cash book are needed, and records must be kept for at least six years.
4. Client ledgers and a cash book are needed, and records must be kept for as long as the client's matter stays open.
5. A list of client balances alone is needed, and records need be kept only until the accountant's report is signed.

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Answer: C. Rule 8.1 of the SRA Accounts Rules requires the firm to keep accurate, contemporaneous and chronological records of all client money dealings, including a client ledger for each client, a list of all the balances on those ledgers, with a current balance shown at all times, and a cash book of all transactions through the client account. The firm must also keep a central record of bills or written notifications of costs (rule 8.4). Rule 13.1 requires accounting records to be stored securely and kept for at least six years. A cash book alone does not show what is owed to each client, and a three-year retention period is too short.

SRA Accounts Rules, rules 8.1, 8.4 and 13.1

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Solicitors Accounts · Residual client balances

A closed conveyancing file shows a residual balance of £312 in the client account for Mr Ferreira. The firm wrote to his last known address twice and both letters were returned. His telephone number is disconnected, and the cost of tracing him further would exceed the sum held. The firm has no instructions from him. What may the firm do with the £312 under the SRA's rules on withdrawing client money?

1. Transfer it to the business account as unclaimed money, because the client has abandoned it.
2. Keep it in the client account indefinitely, because the firm can never pay it to anyone else.
3. Apply to the SRA for authority, because every withdrawal of unclaimed client money needs the SRA's written permission.
4. Pay it to a charity of the firm's choice without SRA authority, as it is £500 or less, after taking and recording reasonable steps to return it.
5. Pay it to a charity only once six years have passed since the file was closed.

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Answer: D. Rule 5.1(c) of the SRA Accounts Rules allows a withdrawal of client money on the SRA's prior written authorisation or in prescribed circumstances. Under the SRA's prescribed circumstances, a firm may pay a residual balance of £500 or less to a charity of its choice without prior SRA authority, if it has taken reasonable steps to return the money to the client and keeps a record of those steps and of the payment. Here the firm wrote twice, the telephone number is dead and further tracing would cost more than the sum held, so reasonable steps have been taken. Larger balances need SRA authority. The £312 must not be moved to the business account for the firm's own benefit, and rule 2.5 means it should not simply be kept for ever.

SRA Accounts Rules, rules 2.5 and 5.1(c); SRA guidance: Withdrawing client money in prescribed circumstances

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Solicitors Accounts · Returning client money

The firm acted for Mrs Wu on her house purchase. Completion and registration finished two months ago, and the Land Registry has issued the new title. All fees and SDLT have been paid. The client ledger still shows £3,900, which is unused money that Mrs Wu paid on account. The fee earner wants to keep it in case a future problem arises on the file. Mrs Wu has not asked for the money. What does the Accounts Rules, rule 2.5, require?

1. The firm may keep it for six years, which is the period for which it must keep the file.
2. The firm must wait until the next accountant's report before it returns the money.
3. The firm may keep it until Mrs Wu asks, because the duty to return arises only on a request.
4. The firm may transfer it to the business account as a payment towards any future work.
5. The firm must return it promptly, because there is no longer a proper reason to hold it.

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Answer: E. Rule 2.5 of the SRA Accounts Rules says client money must be returned promptly to the client or third party as soon as there is no longer any proper reason to hold those funds. Once the fees, SDLT and registration have been paid, nothing remains to be done, so the £3,900 must be returned. The fee earner's wish to keep it against a possible future problem is not a proper reason. The duty does not wait for a request, and it is not linked to file retention or the accountant's report. The firm may not treat the money as a payment for future work without the client's instructions, and moving client money to the business account other than for a billed amount would breach rules 4.3 and 5.1.

SRA Accounts Rules, rules 2.5, 4.3 and 5.1

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Solicitors Accounts · Prompt payment of client money

On Tuesday, the firm receives a cheque for £25,000 from Mr Njoku towards the deposit on his house purchase, which will not complete for three weeks. The fee earner puts the cheque in a drawer, because she wants to wait until nearer completion to avoid paperwork. When the partner discovers this on the following Monday, what is the position under the SRA Accounts Rules?

1. No breach has occurred, because client money need only be banked on the day of completion.
2. No breach has occurred, because the firm may hold a cheque for up to 14 days before banking it.
3. A breach has occurred, but only if the cheque later fails to clear at the bank.
4. A breach has occurred, because client money must be paid promptly into a client account when received.
5. A breach has occurred, but only if Mr Njoku objects to the delay in banking the cheque.

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Answer: D. The cheque is client money, because it is held on behalf of the client for the purposes of the purchase (rule 2.1). Rule 2.3 requires the firm to ensure that client money is paid promptly into a client account, subject only to limited exceptions that do not apply here. Keeping a cheque in a drawer for six days, and intending to keep it for longer, is not prompt, and it also puts the money at risk. The rules do not give a period of days during which a cheque may be held, and they do not wait for completion. The breach is not dependent on the cheque bouncing or on the client objecting. The firm should bank the cheque at once and record the breach and its correction.

SRA Accounts Rules, rules 2.1 and 2.3

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Solicitors Accounts · Probate: money held as executor

Amira Hassan, a partner at the firm, is named as an executor in her client Mr Ali's will, together with his daughter. After his death, Amira, acting as executor, sells his shares and receives £90,000 into the firm's hands. The cashier says that because the firm is not holding the money for a client but as the owner's representative, it can be treated as the firm's money. How should the £90,000 be treated?

1. As business money, because Amira is entitled to claim for her professional charges from the estate.
2. As client money, because it is held as a trustee or holder of an appointment, and it goes into the client account.
3. As business money until the grant of probate is issued, and as client money afterwards.
4. As client money only if the daughter, as co-executor, signs a written instruction to treat it as such.
5. As client money only for the part that exceeds the expected tax and costs, and as business money for the rest.

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Answer: B. Rule 2.1(c) of the SRA Accounts Rules includes within client money any money held or received as a trustee or as the holder of a specified office or appointment. An executor holds estate money in this kind of fiduciary capacity. The £90,000 belongs to the estate and is held by Amira in her capacity as executor, so it is client money. It should be paid promptly into a client account (rule 2.3) and kept separate from the firm's own money (rule 4.1), and the firm's costs may be paid from it only after a bill or written notification (rule 4.3). The right to claim professional charges does not turn estate money into business money. The status does not depend on the grant or on the co-executor's instruction.

SRA Accounts Rules, rules 2.1(c), 2.3, 4.1 and 4.3

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Solicitors Accounts · Accounting entries: receipt of a deposit

The firm acts for Mr Roy on the sale of his house. The buyer's solicitor pays the 10% deposit of £30,000 into the firm's client account. The firm's bookkeeper must record the receipt in the firm's client account records, using double entry. Which of the following correctly records the receipt?

1. Debit Mr Roy's client ledger £30,000; credit the client account cash book £30,000.
2. Debit the client account cash book £30,000; credit Mr Roy's client ledger £30,000.
3. Debit the business account cash book £30,000; credit Mr Roy's client ledger £30,000.
4. Debit the client account cash book £30,000; credit the firm's profit and loss account £30,000.
5. Debit the client account cash book £30,000; credit the buyer's client ledger £30,000.

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Answer: B. When money is received into the client account, the client account cash book is debited (the bank balance rises) and the ledger of the client entitled to the money is credited (the firm owes the client that sum). Mr Roy is the firm's client, and the deposit is received in his sale matter, so his ledger is credited. The firm acts for the seller, so the buyer has no ledger at the firm. Rule 8.1 requires accurate, contemporaneous and chronological records of this kind. Debiting the ledger and crediting the cash book reverses the entries and would record a payment out. The firm's profit and loss account is never affected by client money, since it does not belong to the firm.

SRA Accounts Rules, rule 8.1

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Solicitors Accounts · Accounting entries: completion statement

The firm acts for Ms Idris on the sale of her flat for £320,000. The firm already holds the £32,000 deposit, and on completion receives the balance of £288,000. From the client account, the firm redeems her mortgage at £141,500 and pays the estate agent's invoice of £4,800 (including VAT). The firm's own bill, which has been delivered, is £1,200 plus VAT of £240. The firm pays that bill from the client account and pays the balance to Ms Idris. How much does Ms Idris receive?

1. £140,260
2. £172,260
3. £172,500
4. £177,060
5. £178,500

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Answer: B. The client ledger receives £32,000 and £288,000, which is £320,000. The payments are £141,500 to redeem the mortgage, £4,800 to the estate agent, and the firm's bill of £1,440 (£1,200 plus £240 VAT). The firm may pay its bill from client money because it has been delivered (SRA Accounts Rules, rule 4.3). The total outgoings are £147,740, leaving £172,260 for Ms Idris. The ledger must not go into debit at any time (rule 5.3), which is why the funds are all received before the payments are made. Answer £172,500 leaves out the VAT on the firm's bill, and £140,260 counts only the money received on completion.

SRA Accounts Rules, rules 4.3, 5.3 and 8.1

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Solicitors Accounts · Transfers between client ledgers

Mr and Mrs Fox hold £90,000 in the client account from the sale of their home. They tell the firm in an email that they want £40,000 of it to be used as a gift towards the deposit on their daughter's house purchase, for which the firm acts. The cashier asks whether the money can be moved from the parents' ledger to the daughter's. Which of the following is correct?

1. No, because money held for one client can never be used for another client, even with the first client's instructions.
2. Yes, on the parents' written instructions, with the transfer recorded as a debit on their ledger and a credit on the daughter's.
3. Yes, on the daughter's oral request, since she is the person who will benefit from the transfer.
4. Yes, but only through the business account, so the money first becomes the firm's money.
5. Yes, without any record, because both ledgers are in the same client account.

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Answer: B. Client money may be withdrawn from a client account following instructions from the client for whom it is held (SRA Accounts Rules, rule 5.1(b)), and only if sufficient funds are held for that client (rule 5.3). The parents have given clear written instructions to apply £40,000 for their daughter's benefit, and they have sufficient funds. The transfer is permitted, and must be recorded by debiting the parents' ledger and crediting the daughter's (rule 8.1). It is the instructions of the paying client that matter, not those of the person who benefits. Money must not pass through the business account, because that would mix it with the firm's money and breach rule 4.1. The firm should also consider whether the daughter's lender needs to be told of the gift.

SRA Accounts Rules, rules 4.1, 5.1(b), 5.3 and 8.1

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Solicitors Accounts · Mortgage advance received early

The lender funding Ms Brandt's house purchase pays its £200,000 advance to the firm three days before the planned completion. The seller's chain then collapses, and completion is postponed by at least three weeks. The lender asks the firm to return the advance at once. The fee earner would prefer to hold it in the client account until the new date, since the funds are for this very purchase. What is the correct course?

1. Hold the advance until the new completion date, because it was sent for this transaction and the firm has no duty to return it.
2. Move the advance to the business account to earn interest for the firm until the new date.
3. Return the advance promptly to the lender, because there is no longer a proper reason to hold it and the lender has asked for it.
4. Return only the part of the advance not needed for the firm's own bill, and retain the rest for costs.
5. Hold the advance and ask Ms Brandt, the borrower, whether she objects to its return.

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Answer: C. The advance is client money, because the firm holds it on behalf of the lender, its client, in respect of regulated services (SRA Accounts Rules, rule 2.1). It must be held in the client account (rule 2.3) and must be available on demand (rule 2.4). Where there is no longer any proper reason to hold it, it must be returned promptly (rule 2.5). The lender has asked for it back and completion has been postponed, so the firm must return it. The firm may not use it to earn interest for itself or to pay its own costs, because the lender has not instructed that, and a bill has not been delivered (rule 4.3). Ms Brandt's views are not relevant to the lender's money. Interest may be owed to the lender for the period held (rule 7.1).

SRA Accounts Rules, rules 2.1, 2.3, 2.4, 2.5 and 4.3

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