1.1 Who should read this practice note?
All solicitors who hold client money.
1.2 What is the issue?
When client funds remain unclaimed after the closure of a client matter, certain measures need to be taken prior to the release of the funds other than to the client. The way in which this should be approached depends upon whether the client can be traced, and the size of the balance held in the client account.
This practice note provides an overview of the requirements imposed upon firms under the SRA Accounts Rules 2011 (SAR) and offers practical guidance for dealing with residual client balances.
2 SRA Accounts Rules
Under rule 14.3 of the SAR you are required to return client money to your clients promptly, which is as soon as there is no longer any proper reason to retain those funds. Payments received after you have already accounted to the client, for example, by way of a refund, must also be paid to the client promptly. Your obligation to return funds which rightfully belong to a client extends to all balances, regardless of how small the sum might be.
If funds are to be retained, rule 14.4 of the SAR states that you must inform your client promptly in writing, and provide details of the amount held at the end of the matter and the reason for retention. In addition to this, you must also inform your client in writing at least once every 12 months of the amount of client money still held and the reason for retention. This must be done for as long as you continue to hold that money. For further information, see the Law Society practice note on holding client funds.
As a matter of good practice, you should attend to outstanding client balances on an annual or six monthly basis.
3 Residual client balances
Rule 14.3 of the SAR requires you to return client money to the client. However, there may be circumstances in which you face difficulties in your attempts to do so. Client funds could remain unclaimed in the following circumstances:
- the original fee-earner is no longer involved (for example, the balance was acquired as the result of a merger)
- 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 his or her contact details without informing you
- your client is deceased and the executors unknown
- retentions have not otherwise been claimed
In these circumstances, you should take steps to locate your client or otherwise establish the identity of the owner of the residual funds.
3.1 Steps to locate your client
You should make reasonable attempts to locate your client, by reference to the amount of money remaining in the client account and the costs associated with tracing the owner of the funds. You may wish to take a number of the following steps in order to locate your client:
- check the client file for contact details
- write to all the known addresses of the client
- telephone all client numbers on the file
- attempt to contact the client via third parties, for example, family member, employer, bank
- check the telephone directory
- check the electoral roll. If there are only a small number of matching names in the appropriate region, consider writing to all of them
- carry out an internet search against the client's name
- consider using the Department for Work and Pensions' (DWP) letter forwarding service, if the previous address of the client is known (note that a small charge will be payable and every effort must have been made to trace the person before contacting DWP)
- place a newspaper advert (for larger residual funds)
- instruct enquiry or intelligence agents (for larger residual funds)
- in estate matters, contact the executors
- for corporate clients, contact Companies House
3.2 If your client can be traced
If a situation arises, where your client can be traced but fails to cash a cheque or to give instructions and no prior agreement has been made as to the disposal of residual funds, you may write to advise the client that the money will be donated to charity under the SAR procedure (see sections 4 and 5 below), unless you hear to the contrary within a stated and reasonable period of time.
Alternatively, a client who you have successfully traced may ask you to deal with disposal of the residual balance at your discretion. In this case, you should seek the client's consent to donate the balance to charity, keeping a detailed note of their consent and which charity they wish to donate the money to. You may then make the donation from the client account, clearing the balance and client ledger.
3.3 If your client cannot be traced
If you have exhausted all reasonable attempts to trace your client, you should then donate the funds to charity, following the procedure set out in the SAR (see sections 4 and 5 below). The process for withdrawal and disposal of the funds will depend on the amounts involved.
4 Withdrawal of funds of £500 or less
If the client money to be withdrawn is not going to be paid to a charity, you must apply to the SRA for authorisation, whatever the amount involved. This situation might arise, for example, if you have been unable to deliver a bill of costs because the client has become untraceable, preventing you from making a transfer from client to office account in accordance with rules 17.2 and 17.3 of the SAR.
For very small amounts owed to a client (less than £4), provided you have no reason to believe that your client has moved address, you may wish to send the balance to them in the form of postage stamps. If you choose to do this you should send first or second class stamps to the value of the amount owed, so that the client can use the stamps to his or her best advantage. However, if your client has become untraceable, you are required to follow the procedure set out in the SAR.
Rule 20.1(j) of the SAR enables you in practice to 'self-certify' residual client balances of £500 or less. Such funds can be donated to a charity without prior SRA approval, once all efforts to locate and reimburse your client have been exhausted. You must ensure that you have undertaken each of the following steps specified by rule 20.2 of the SAR before releasing such funds to a charity:
establish the identity of the owner of the money, or make reasonable attempts to do so
- 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
- record the steps taken in accordance with the requirements immediately above and retain those records, together with all relevant documentation, including receipts from your chosen charity
- keep a central register in accordance with rule 29.22 of the SAR, detailing the name of the client or other person / trust on whose behalf the money is held, the amount paid, the name of the recipient charity, and the date of the payment
What is 'reasonable' will depend upon the circumstances that present themselves in each case. Factors affecting what will be considered reasonable include:
the age of the residual balance
- the amount held
- the client details available
- the costs associated with tracing the client
See section 3.1 for a list of suggested steps to locate your client.
If you are unsure whether you have fulfilled the necessary requirements prior to the release of a sum of £500 or less, you should contact the professional ethics guidance team at the SRA for guidance via the professional ethics helpline for solicitors.
5 Withdrawal of funds in excess of £500
For the withdrawal of balances in excess of £500 per client, you must always seek SRA approval under rule 20.1(k) of the SAR. You will need to advise the SRA of the amount(s) in question, the length of time that the money has been held, and what attempts have been made to contact the client, or evidence that the reasonable costs of doing so are likely to be excessive in relation to the money held.
Applications for authorisation should be made to the SAR using this application form. The SRA asks that one application be made for all outstanding balances on client accounts in excess of £500.
The SRA team can also advise on the criteria which must normally be met for authorisation to be given.
5.1 Information required by the SRA
When applying for authorisation for the withdrawal of funds in excess of £500, the SRA will usually ask you to provide the following:
the name of the client (if known)
- the name of the client account in which the money is held. In relation to the administration of an estate or trust, it will normally be the executors, administrators or trustees, or the court , that have authority to deal with unpaid money. You should satisfy yourself as to any legal requirements in relation to the money
- details of the amount(s) in question, and of any accrued interest
- details of attempts made to trace the rightful owner(s) of the money
- the length of time elapsed since the money became due to the client(s) or other proper recipient(s)
- an indication of the proposed destination of the money, should the SRA grant authority. The SRA may impose a condition that the money is paid to a charity which gives an indemnity against any legitimate claim subsequently made for the sum received (see rule 20.1(k) of the SRA). If your chosen charity will not provide an indemnity, you should make suitable insurance arrangements yourself. The Law Society Charity is able to receive such funds and will provide an indemnity for the amount received where any necessary SRA approval has been obtained. For further information, see the Law Society charity document Donating unclaimed funds.
Generally the SRA advises that the greater the attempts to locate your client made before filing your application, the quicker the application will be dealt with. The list at section 3.1 of this practice note highlights some of the key steps you should take before submitting an application to the SRA.
When making its assessment of your application, the SRA may ask that you take further steps to determine the whereabouts of your client. In particular, the SRA may ask for documents relating to the searches you have carried out.
Reasonable out-of-pocket expenses of up to £500 incurred during unsuccessful attempts to trace the client may be taken into account and deducted from the residual balance, but the SRA does not have any legal authority to authorise such expenditure. If you do manage to trace the client, you must agree deduction of the expenses from the money held. If the client remains untraceable, the SRA would normally require only the amount over and above the out-of-pocket expenses to be paid to charity.
Note: Any funds due to a dissolved company may be bona vacantia, and payable to the Treasury Solicitor under the provisions of the Companies Act. In this event, you should clarify the situation with the Bona Vacantia division (BVD) of te Government Legal Department before you make an application to the SRA.
6 Overview flow chart
7. Accounting duties
Your reporting accountant must check (on a sample basis) that the procedural side of the requirements have been executed appropriately, in relation to record-keeping. Under rule 26.1(ii) and rule 29, your accountant is also required to report on any substantial departures from the guidelines discovered while carrying out work in preparation of its report. However, your accountant is not expected to judge the adequacy of the steps taken to establish the identity of, and to trace, the rightful owner of unclaimed client money.
You should also be aware that absence of client details may amount to deficiencies in the management of your firm, as required by chapter 7 of the SRA Code of Conduct 2007 (SRA Code).
7.1 After you have received SRA authorisation
If the SRA hasn not granted you the authority to close your client account, you must continue to deliver accountants' reports up to the date you cease to hold client money. For advice on accountants' reports, you should contact the SRA Resolution Team.
If the SRA grants authority to close your client account, you will nevertheless remain liable to account to a rightful claimant, if such a claimant reappears or is traced at a later date.
8. Preventative measures
Agreeing at the outset about how surplus funds will be disposed should help to prevent future problems developing, and for this purpose you may need to collect appropriate information from clients, such as their National Insurance number. You may wish to include information in the client-care letter or your terms and conditions about what will happen to funds in instances where clients cannot be traced after the closure of a matter. For example, you may enter into an arrangement with a corporate client that small amounts relating to different matters are accumulated, and then accounted for at agreed intervals, or alternatively donated to charity (see section 5). However, you must always bear in mind in such arrangements your obligation to treat your clients fairly (outcome 1.1 of the SRA Code).
As a matter of good practice, you should attend to outstanding balances on an annual or six monthly basis.
When involved in a merger or acquisition, acquiring firms should not accept liability for existing client balances without taking receipt of the relevant files.
9. More information
9.1 Information required by the SRA
Solicitors' Accounts Rules 2011
SRA Ethics Guidance - withdrawal of residual client funds
9.2 Further products and support
9.2.1 Practice Advice Line
The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 0870 606 2522 from 09:00 to 17:00 on weekdays.
Find out more about the Practice Advice Service.
9.2.2 The Law Society Charity
The Law Society Charity is a charitable fund that makes grants to a wide range of organisations and individuals with a view to directly furthering law and justice. See the Law Society Charity homepage for further information, or email firstname.lastname@example.org.
9.2.3 SRA Professional ethics helpline for solicitors
For general advice, contact the Solicitors Regulation Authority, The Cube, 199 Wharfside Street, Birmingham, B1 1RN telephone 0370 606 2577 (inside the UK), 09.00 to 17.00, Monday to Friday.
For applications under rule 20.1(k) SAR, you should submit the prescribed application form to the Professional ethics team.
9.2.4 Department for Work and Pensions (DWP)
Contact DWP Letter Forwarding Service Durham House, Washington, Tyne & Wear NE38 7SF, or visit the DWP website.
9.2.5 SRA Resolution Team
Email email@example.com or call 0870 606 2555.