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Residual balances on law firm client accounts

View profile for Elaine Pasini MCIM
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Regulated law firms in England & Wales hold dual ledgers and residual client account balances need prompt attention. The accounts law firms hold are:

  1. business accounts
  2. client accounts

Client accounts are heavily regulated under the SRA Accounts Rules. If there are residual balances sitting in client accounts that haven’t been promptly cleared as soon as there is no longer any proper reason to hold those funds, your law firm is breaching the rules.

BOOK HERE for Residual Balances Training

ILFM advice on law firm residual client balances

Law firm compliance officers, especially the COFA, need to be on top of this subject and this COFA News Blog is worth a read.

Residual Balance Definition

Law firms may find themselves holding money in a client account at the close of a matter, and which they are unable to return to the client or third party who are legally entitled to it.

The SRA has recently fined a law firm £5,899 in a regulatory settlement agreement after it found that the firm held £596,707 in 393 residual client balances dating back almost 29 years.

To read the SRA’s case please read HERE.

Why? What reasons were given for this historic breach? Pressure of new work was the reason given for allowing them to remain unresolved.

In response to the fine, the SRA said,

“The breaches formed a pattern of misconduct and continued after it was known to be improper”.

“The firm held onto funds which belonged to its clients for an unacceptable period. The delay in returning client funds increased the risk that the intended recipients would not be located and would not receive their funds.”

What rules and principles did the law firm breach?

The legal practice breached the Accounts Rules (as such an historic breach the rules related to Solicitors Accounts Rules 1998, Accounts Rules 2011, and 2019 rules) in relation to:

  • failing to return money to clients promptly when their matters concluded,
    • not taking steps to address the high number of residual client balances upon receipt of the first Qualified Accountant’s Report in June 2021, and
    • failing to advise clients about the money due back to them when matters concluded.

The law firm also breached the SRA Principles from 2011 and 2019 including acting in the best interests of each client, act in a way that upholds public trust and confidence in the solicitors’ profession and in legal services provided by authorised persons.

Finally, the law firm also breached the Code of Conduct for Firms (both 2011 and 2019) in relation to effective structures, systems and controls.

Amy Bell, from Teal Compliance, an ILFM trainer in anti-money laundering (AML) said that she calls these balances the “Friday Afternoon Drawer”. Time, she says, put aside to sort out dead files and client account residual balances when it was quiet. However, whoever finds that “quiet time” in reality?

Compliance Overview of Residual Client Balances

The ILFM is the professional body for legal finance, compliance, and practice management and with that in mind, this article documents the process of how to manage residual balances to ensure compliance with the SRA Accounts Rules.

What policies and controls are in place to close files promptly? Are the residual funds paid promptly back to clients and what research and checks are being done to find clients who are no longer at an address you have?

Examples of why Client Accounts have Residual Balances

Aborted residential property purchases. If the client paid the law firm a deposit for the property, but it fell through, those monies must promptly be returned.

Probate and client monies on account to cover unknown HMRC fees.

Other reasons for residual balances sitting on client accounts are (as stated in the Law Society Guide).

  • the balance was acquired from a predecessor firm as the result of a merger and the original fee earner is no longer involved
  • monies that you have returned to your client have not been processed (for example, the cheques have not been cashed)
  • your client will not provide instructions about how the funds should be dealt with
  • your client has changed their contact details without telling you
  • your client is deceased, and the executors are unknown
  • retentions have not otherwise been claimed

Who is Responsible for Residual Client Balances?

The person responsible for this process is the COFA and/or other partners responsible for financial issues. Our COFA resources page can be found HERE

Residual Balance Review Questions

The ILFM recommends all law firms to run a quarterly review of their residual client balances.

Within the review the questions to ask include:

  • For each outstanding residual balance on the register, have you
  1. made reasonable attempts to establish the rightful owner of the money?
  2. taken reasonable steps to return the money to the rightful owner?
  3. recorded the steps taken to return the money to the rightful owner and retained those records?
  4. retained information and all relevant documentation, including receipts from any charity to whom a residual balance is paid?
  5. entered the balance onto a central residual balance register?
  • For residual balances of £500 or less, have you taken appropriate steps to pay the money to charity (where the SRA’s conditions for doing so are met)?
  • For outstanding residual balances exceeding £500, have you taken appropriate steps to apply to the SRA for written authorisation to withdraw the money from client account? GUIDANCE HERE
  • Has your review revealed any compliance breaches? And is your Breach Reporting Policy being followed?
  • Has this review revealed any training needs? Book you/your team onto RESIDUAL BALANCE TRAINING.
  • Has this review revealed any remedial or other action that may be required to improve the firm’s procedures for dealing with residual balances?

Charities the ILFM work with when it comes to residual balances are Access to Justice Foundation and Support Through Court.

ILFM Residual Balance Checklist Template HERE