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Residual client balances

22 January 2016

This practice note includes advice on:

  • the rules relating to residual client balances  
  • steps to take to return funds to clients 
  • what to do when the client cannot be traced  

What has changed?

  • since October 2014, residual client balances of £500 or less can now be dealt with by firms without authorisation from the SRA  
  • references to accountants' letters in section 3 have been removed  
  • section 3 has been updated to include steps you should take to trace your client

Legal status

This practice note is the Law Society's view of good practice in this area. It is not legal advice.

Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.

Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.

For queries or comments on this practice note, contact the Law Society's Practice Advice Service.

Professional conduct

There are 10 mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.

Similar principles also apply to solicitors, or managers of authorised bodies who are practising from an office outside the UK, and to lawyer-controlled bodies practising from an office outside the UK, by virtue of the SRA Overseas Rules 2013.

It would be sensible to familiarise yourself with the principles which underpin all aspects of the SRA regulatory approach.

The following sections of the SRA Handbook and in the SRA Code apply:

  • principle 4: act in the best interests of each client  
  • principle 5: provide a proper standard of service to your clients  
  • principle 10: protect client money and assets 

Terminology

Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.
Should - Outside of a regulatory context, good practice for most situations in the Law Society's view. In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance). These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.
May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.
SRA Code - SRA Code of Conduct 2011
SRA - Solicitors Regulation Authority
IB -indicative behaviour
 

The Law Society also provides a full glossary of other terms used throughout this practice note

1 Introduction

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 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 14.4 of the SAR requires you to return client money. However, there may be circumstances in which you may 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 (eg 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 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

  • 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, eg 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 of Work and Pensions' letter forwarding service, if the previous address of the client is known  
  • place a newspaper advert (for larger amounts of funds)  
  • instruct enquiry agents (for larger amounts of 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 surplus 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 period of time.

Alternatively, a client who you have successfully traced may ask you to deal with disposal of the residual balance. 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 a 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. 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 money to be withdrawn is not going to be paid to a charity, you must apply to the SRA for authorisation. 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 provisions 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 released to charity without prior SRA approval, once all efforts to reimburse your client have been exhausted. You must ensure that you have undertaken the following steps specified by rule 20.2 before releasing such funds:

  • 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 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, detailing the name of the client or other person / trust on whose behalf the money is held, the amount, 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 located 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 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). 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 via the Professional ethics helpline for solicitors using an 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 section 4). 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 checklist at section 3.1 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, 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 Treasury Solicitor's Department before you make an application to the SRA.

6 Overview flow chart

Residual client balance flowchart

6.1 After you have received SRA authorisation

If the SRA hasn't 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 an authority, you will nevertheless remain liable to account to a rightful claimant, if such a claimant reappears or is traced at a later date.

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 the 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).

8. Preventative measures

Agreeing at the outset about how surplus funds will be disposed should help to prevent future problems developing. 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.

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 lawsocietycharity@lawsociety.org.uk.

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 of 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 resolutionteamenquiries@sra.org.uk or call 0870 606 2555.

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