While some firms have improved their procedures in response to SRA Guidance and advice, many still struggle to comply with the rules governing residual balances. Failure to address residual balances can result in significant consequences, such as reputational damage, business disruption, and increased professional indemnity insurance (PII) premiums.
Residual balances occur when funds remain in a client account after the conclusion of a legal matter or when no ongoing legal service exists. Under Rule 2.5 of the 2019 SRA Accounts Rules, firms must ensure that client money is returned promptly to the client or third party once there is no valid reason to retain those funds.
Challenges arise when clients are unresponsive or when firms lack sufficient information to return the balances. Firms are still obligated to take “reasonable steps” to return the funds.
This depends on:
- The age and size of the balance,
- Availability of current client contact information
- Costs associated with locating the client.
- Addressing Residual Balances
- Payments to Charity
If efforts to return residual balances prove unsuccessful, firms can donate amounts under £500 to a charity of their choice, provided proper records are maintained.
For balances exceeding £500, SRA approval is required before making a charitable donation.
When seeking approval, firms must demonstrate their attempts to return the funds. If approved, the SRA requires the donation to be made to a charity that offers repayment guarantees, allowing the client to reclaim the funds should they come forward in the future.
Avoiding Banking Facilities Breaches
Firms must also comply with Rule 3.3, which prohibits using client accounts as banking facilities for clients or third parties. Payments into or out of a client account must relate directly to the delivery of regulated legal services.
Law firms should exercise caution when:
- Clients request that balances remain in the account after a matter concludes, or
- Clients ask for payments to be made to third parties.
- Providing banking facilities is prohibited and remains a key area of focus for the SRA.
Firms should take proactive steps to ensure compliance with Rules 2.5 and 3.3. While each firm’s approach may vary depending on its size, client base, and areas of practice, the following measures are recommended:
COFAs should regularly review the latest guidance and case studies published by the SRA, particularly on residual balances and banking facilities.
Use matter balance listings and reconciliation reports that include “last movement dates.” COFAs should promptly follow up on slow-moving balances or those indicating potential residual balances.
Provide regular reminders to fee earners about the importance of:
- Communicating with clients to ensure prompt return of funds, and
- Avoiding breaches related to banking facilities.
- Annual Client Communication: send annual reminders to clients about balances held on their behalf, with details of any ongoing legal matters.
- Implement and regularly review file closure procedures to ensure they align with compliance requirements.
SRA Client money in legal services – safeguarding consumers and providing redress: The model of solicitors holding client money:
https://www.sra.org.uk/sra/consultations/consultation-listing/holding-client-money/