Residual Client Balances

A perennial topic for queries, and one that affects most firms that hold client money, is that of the residual client balance – a problem that can often get left on the back-burner when day-to-day client matters are vying for attention. This, however, can be a mistake. When a firm eventually comes to sorting out the mess it can consume hours of fee earning time and the potential for dealing with matters incorrectly can present a headache.

Prevention is better than cure

The first avoidance step is the simple measure of making sure that clients are informed in the client care letter or terms of business of the importance of keeping the firm up to date with any change of contact details. One of the main reasons why balances arise in the first place is that the firm simply does not have any current contact details for the client and so cannot therefore account to them with any moneys held.

Secondly, firms should remember that it is a requirement of the Accounts Rules that where money continues to be held for a specific purpose after the end of a matter, the client must be told and the reason for the retention explained (Rule 14.4). At this point, it would also be sensible to remind the client of the importance of keeping the firm informed of any new contact details.

Finally, Rule 14.4 also requires that if money continues to be held in this way the client must be notified at least every twelve months that the money is still held and why. Again, a good opportunity to prompt the client about contact details.

Dealing with Balances

Despite all these steps being taken to retain contact with clients, circumstances will undoubtedly arise where residual balances do arise and inevitably these will need to be dealt with in accordance with the rules.

Rule 20(1)(j) and 20(2) of the Accounts Rules set out the requirements that firms need to abide by when dealing with residual balances.  Because of the number of queries this subject generates, the SRA has issued supplemental guidance – www.sra.org.uk/solicitors/code-of-conduct/guidance/guidance/Withdrawal-of-residual-client-balances.page

If residual money held for an individual client exceeds £500, then an application to transfer it must be made to the SRA. An application must also be made to the SRA if the firm wants to transfer a smaller sum but wishes to retain it. This is likely to arise if there are outstanding costs due to the firm and the delivery of a bill has proved impossible because the client is no longer contactable. In both circumstances, the firm will be required to demonstrate it has taken adequate steps to identify the owner of the money and to return it.

Where sums involved are £500 or less a firm must comply with rule 20.2 before transferring the money. This requires that the firm must:

  1. establish the identity of the owner of the money, or make reasonable attempts to do so;
  2. make adequate attempts to ascertain the proper destination of the money, and to return it to the rightful owner, unless the reasonable costs of doing so are likely to be excessive in relation to the amount held;
  3. pay the funds to a charity;
  4. record the steps taken in accordance with rule 20.2(a)-(c) above and retain those records, together with all relevant documentation (including receipts from the charity), in accordance with rule 29.16 and 29.17(a); and
  5. keep a central register in accordance with rule 29.22.

The most time-consuming aspect of this process is the need to make reasonable attempts to return the money to its rightful owner. The SRA guidance says that the extent of the investigations required by the firm to find the client will depend on:

  • the age of the residual balance;
  • the amount held;
  • the client details available in respect of a balance; and
  • the costs associated with a particular tracing method.

Clearly, the larger and more recent the balance the more extensive the enquiries that will be required. The SRA suggests enquiries which should be considered include newspaper advertising or the use of a tracing agent, internet searches, directory enquiries, electoral register searches, the Department for Work & Pensions letter forwarding service and a Companies House search.

If these searches are unsuccessful, it is important that the steps that have been undertaken are recorded and that a central register of balances dealt with in this way is maintained. This is required by the rules and is something the SRA could ask to see.

On 25 November this year the new SRA Standards and Regulations will come into force. There are two interesting changes to the new Accounts Rules which might affect the issue of client balances held after the client matter has completed. The first is that there is no longer going to be any obligation to keep the client updated at least every twelve months when client money continues to be retained for some legitimate purpose. Whether firms will want to continue to do this will, therefore, be at their discretion. It might, however, be a useful way of retaining contact with the clients concerned.

Secondly, the new rules have removed all the detail about how money can be transferred where contact is lost with the client. The new rule 5.1 (c) simply says that this money can only be withdrawn “on the SRA’s prior written authorisation or in prescribed circumstances”. At present we do not know what these “prescribed circumstances” will be. It is probable that they will be the same or similar to those set out in the current rule 20.2 but COFAs and those with responsibility for Accounts Rules compliance need to be alert to further SRA elucidation.

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