Client Money Handling: Best Practices for UK Law Firms

Of all the obligations facing a UK law firm, the duty to protect client money is the most unforgiving. The SRA intervenes in roughly 50 practices every year, and mishandling client money — through theft, negligence, inadequate systems, or simple carelessness — is the most common reason cited. Intervention means the SRA walks in, takes over, closes the firm to new business, and distributes outstanding matters to other solicitors. The human and financial cost to the partners, staff, and clients is severe.

This article sets out the practical best practices every UK law firm should embed to protect client money, satisfy the SRA Accounts Rules, and reduce the risk of the catastrophic failures that lead to intervention.

Understanding Your Obligations Under the SRA Accounts Rules

The SRA Accounts Rules 2019 establish the framework for client money handling. Before implementing any controls, every partner and COFA needs to understand what the Rules actually require.

The fundamental obligations are:

• Separation: client money must be held in a designated client account and never mixed with the firm’s office money
• Promptness: client money must be banked by the end of the next working day after receipt
• Accuracy: individual client ledgers must be maintained for every client and matter
• Reconciliation: client account balances must be reconciled at least every five weeks
• Interest: a fair and reasonable amount of interest must be paid on client funds held over time
• Residuals: money that cannot be returned must ultimately be paid to the SRA, not retained

The Rules are principles-based — they tell you what must happen, not always precisely how. This gives firms flexibility but also increases the risk of well-meaning approaches that fall short. Where you are uncertain, the SRA’s published guidance and the Law Society’s practice notes fill many of the gaps.

Segregation of Duties

Why Segregation Matters

In a small or medium-sized law firm, one of the most significant risk factors for client money misappropriation is the concentration of authority over client accounts in too few people. When a single person can both authorise payments and maintain the ledgers — without any independent check — the opportunity for fraud exists even if that person has no current intention to act dishonestly.

The SRA’s case files from interventions show a clear pattern: in the majority of cases where a fee earner or cashier has misappropriated client funds, the misappropriation was enabled by inadequate segregation of duties. It often went undetected for months or years because no independent person was reviewing both the bank statements and the ledger records.

Implementing Segregation Effectively

Effective segregation requires that:

• The person who authorises a payment from client account should not be the same person who reconciles the account
• Bank statements should be reviewed by someone who is not responsible for the day-to-day ledger entries
• The COFA or a designated compliance monitor should review reconciliations before they are signed off
• Surprise spot-checks of client ledgers against matter files should be carried out periodically

In a sole practitioner or two-partner firm, full segregation is difficult. In those circumstances, the next best control is more frequent external review — asking the reporting accountant to carry out interim visits, not just the annual Accountant’s Report examination.

The Reconciliation Process

What a Good Reconciliation Looks Like

A five-weekly reconciliation that simply compares two numbers and confirms they match is not sufficient. A genuinely useful reconciliation:

1. Takes the bank statement balance (not the practice management system balance — the actual bank statement)
2. Adds any payments out already in the system but not yet cleared
3. Deducts any receipts already in the system but not yet cleared
4. Arrives at an adjusted bank balance
5. Compares this with the sum of all individual client ledger balances
6. Identifies and investigates any difference, however small

The investigation of differences is the critical step. In a well-run firm, small differences arise from timing — a cheque in the post, a BACS payment processing overnight. These should clear within a day or two. Differences that persist — or differences that appear, disappear, and reappear — are a warning sign that demands immediate escalation to the COFA and, depending on the nature and scale of the discrepancy, potentially to the SRA.

Reconciliation Frequency

The Accounts Rules require reconciliation at least every five weeks. For firms with large volumes of client money transactions — active conveyancing, litigation, or commercial practices — monthly reconciliation is a minimum, and weekly or even daily reconciliation is standard practice in a busy transactional department.

Increasing reconciliation frequency is not bureaucracy. Every additional reconciliation is an opportunity to catch a problem before it becomes a scandal.

Client Account Controls at the Transaction Level

Dual Authorisation for Large Payments

Every firm should implement dual authorisation for payments above a threshold appropriate to the firm’s risk profile. In a conveyancing firm handling six-figure completion monies, dual authorisation for any payment above £10,000 is standard. In a small private client practice, the threshold might be lower.

Dual authorisation means that two individuals — typically a fee earner and a cashier, or two partners — must both approve a payment before it is released. This does not need to be onerous: with modern practice management software, electronic approvals can be configured so that the approver receives a notification and confirms with a click.

Verification of Payee Details

Conveyancing practices in particular are vulnerable to conveyancing fraud, where a fraudster intercepts the email chain and substitutes fraudulent bank details for the legitimate recipient’s account. The consequences of paying completion monies to a fraudster — rather than to the intended recipient — are devastating for the client and potentially for the firm.

Best practice is to verify payee bank details by telephone before making any new or changed payment, using a number obtained independently (not from the email chain). This simple step defeats the majority of conveyancing fraud attempts. The Law Society and SRA have both issued guidance on this risk, and firms that fail to implement verification controls may face difficulty defending negligence claims following a successful fraud.

Monitoring for Unusual Activity

Firms should designate someone — typically the COFA or practice manager — to review client account activity for unusual patterns. Red flags include:

• Multiple small payments to the same payee in quick succession (smurfing)
• Large round-number payments
• Payments to unusual jurisdictions or currencies
• Unexpected receipts that do not correspond to a known matter

Unusual activity should trigger a review of the relevant matter, and — if suspicion cannot be resolved — a report to the firm’s MLRO under the Proceeds of Crime Act 2002.

Interest Obligations

The Legal Requirement

Rule 7 of the SRA Accounts Rules requires firms to pay a fair and reasonable sum of interest on client money held. The obligation applies when the interest that would be earned is more than a negligible amount. Firms must have a written interest policy that sets out the basis on which interest is paid and how it is calculated.

In the current environment — with the Bank of England base rate at historically elevated levels — interest on client funds is no longer negligible for many matters. A firm holding £100,000 on client account for three months in a commercial property transaction will earn several hundred pounds in interest. That money belongs to the client, not the firm.

Common Interest Policy Approaches

Most firms adopt one of three approaches:

1. Actual interest earned: track the interest actually credited to the client account and distribute it proportionally across client matters
2. Benchmark rate: pay interest at a specified rate (often linked to the Bank of England base rate with a deduction for administration costs)
3. Per matter calculation: calculate interest on individual large balances using an agreed rate

Whichever approach you adopt, it must be applied consistently, documented in the client care letter, and capable of being explained to a client who asks.

Handling Specific Transaction Types

Conveyancing: Completion Day Controls

Completion day is the highest-risk moment in a conveyancing transaction. Large sums move at speed, often under time pressure, and the consequences of error are immediate and severe. Best practice on completion day includes:

• Confirming receipt of completion monies before releasing keys or completing the transaction
• Same-day telegraphic transfer of redemption monies to the lender
• Immediate transfer of balance to the client or to the vendor’s solicitor as appropriate
• Completion of the client ledger before the end of the business day

Firms that hold completion monies overnight without good reason — for example, because the cashier has gone home — are creating an unnecessary compliance risk and a potential liability.

Probate: Estate Account Management

In probate matters, the client account holds estate assets — sometimes for months during a complex administration. Best practice includes:

• Opening a designated client account for estates with values above a threshold (typically £50,000)
• Reviewing estate balances monthly and making interim distributions where appropriate to avoid holding money longer than necessary
• Maintaining a detailed estate account document alongside the client ledger, showing every receipt, payment, and the current position
• Obtaining client authority before making any distribution

Personal Injury and Clinical Negligence: Settlement Monies

When damages are received in settlement of a personal injury or clinical negligence claim, the full amount must be paid into the client account immediately. Firms must not deduct costs before the client has agreed a statement of account and confirmed the net payment they will receive. Issuing a statement, obtaining written client authority, and then drawing costs is the correct sequence — not drawing costs first.

Training and Culture

Why Training Matters

The best systems in the world are undermined if the people operating them do not understand why the rules exist. Fee earners who regard Accounts Rules compliance as “the accounts department’s problem” are a liability. Partners who override controls when they are inconvenient — bypassing dual authorisation for a completion payment because a partner is unavailable — are worse.

Every fee earner should receive induction training on client money handling when they join the firm, and refresher training at least annually. The training should not just cover the mechanics — it should explain the consequences of getting it wrong, for clients, for the firm, and for the individual.

Culture from the Top

The SRA’s thematic reviews consistently identify culture as a driver of compliance failures. Firms where senior partners model good practice — submitting to the same controls as junior staff, supporting the COFA in enforcing policies, treating compliance as a priority rather than a burden — have materially better outcomes than firms where compliance is paid lip service.

The COFA’s ability to do their job depends on having the backing of the firm’s leadership. A COFA who lacks the authority to investigate a partner’s matter, or who is overruled when they raise concerns, is a COFA in name only.

Preparing for the Annual Accountant’s Report

The annual Accountant’s Report examination is the external check on your client money handling. A well-prepared firm will:

• Ensure all reconciliations for the period are complete and filed
• Resolve all outstanding ledger differences before the examination begins
• Have client ledgers up to date with no missing transactions
• Be able to produce a list of client matters and balances on request
• Have documented its interest policy and be able to show it has been applied

Treating the accountant’s visit as an opportunity for a genuine review — rather than a test to pass — is the most constructive approach. If the accountant identifies issues during the examination, addressing them promptly and fully is far better than minimising them.

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