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Unclaimed client funds

6 October 2011

1. Introduction

1.1 Who should read this practice note?

All solicitors who hold client money.

1.2 What is the issue?

1.2.1 Outcomes-focused regulation

When client funds remain unclaimed after the closure of a client matter, certain measures need to be taken prior to the release of the monies other than to the client. The way in which this should be approached depends upon the size of the balance held in the client account, and whether or not the client is untraceable.

This practice note aims to clarify the position relating to the management of unclaimed client funds, and provides an overview of the requirements imposed upon firms under the SRA Accounts Rules 2011 (SAR).

1.3 Professional conduct

The following sections of the SRA Code of Conduct 2011 are relevant to this issue:

1.4 Status of this practice note

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.

1.5 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

2007 Code - Solicitors’ Code of Conduct 2007

OFR - Outcomes-focused regulation

SRA - Solicitors Regulation Authority

outcome - outcome

IB - indicative behaviour

2. SRA Principles

There are ten 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.

When thinking about how to meet the outcomes in the Code/Handbook, you must consider the principles which apply across the Handbook including the Code. You should always bear in mind what the ten principles are and use them as your starting point when implementing the outcomes.

Those which are particularly relevant to these rules are that you must:

  • protect client money and assets
  • act with integrity
  • behave in a way that maintains the trust the public places in you and in the provision of legal services
  • comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner; and
  • run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles.

The desired outcomes which apply to the SAR are that:

  • client money is safe
  • clients and the public have confidence that client money held by firms will be safe
  • firms are managed in such a way, and with appropriate systems and procedures in place, so as to safeguard client money
  • client accounts are used for appropriate purposes only; and
  • the SRA is aware of issues in a firm relevant to the protection of client money.

3. The Solicitors' Accounts Rules

The SAR contain specific obligations for the prompt return of surplus client funds and reporting to clients if funds are retained, as detailed below.

3.1 Applying the rules to funds

Under rule 14(3) of the SAR you are required to return client money to your clients promptly - that 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. Further to this, you must inform your client in writing at least once every twelve months of the amount of client money still held and the reason for retention, for as long as you continue to hold that money. For more information see the Law Society practice note on holding client funds.

4. Withdrawing client funds

It is anticipated that the provisions detailed above will reduce the number of residual accounts that become unclaimed or 'orphaned' going forward. However, it is still common for client funds to remain unclaimed in the following circumstances:

  • The balance was acquired further to 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 is deceased and the executors unknown
  • There have been misapplied disbursement payments
  • Retentions have not been claimed.

In these circumstances you should dispose of the funds by donating them to charity (see section 6). Processes for withdrawal and disposal depend on the amounts involved.

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 rule 17 of the SAR.

4.1 Withdrawal of funds less than £50

For very small amounts owed to a client (less than £4), provided you have no reason to believe that your client has moved address, the SRA advises that you 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.

4.1.1 Clients that have become untraceable

If a client cannot be traced in respect of a smaller sum, it is up to you to decide what steps should be taken, weighing up the cost of investigating the client's whereabouts against the value of the amount held.

In practice, this enables you to 'self-certify' balances of £50 or less on unclaimed client accounts by virtue of rule 20 (2). Such funds can now be released to charity without prior SRA approval once all efforts to reimburse your client have been exhausted. However, you must ensure that you have undertaken the following steps before releasing such funds:

  • establish the identity of the owner of the money, or make reasonable attempts to do so
  • make reasonable 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 above and retain those records, together with all relevant documentation including receipts from your chosen charity; and
  • keep a central register in accordance with rule 29 (22) SAR, 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.

4.1.2 Applying for authorisation

If you are unsure whether you have fulfilled the necessary requirements prior to the release of sums less than £50, you may still apply to the SRA for authorisation. Applications for authorisation should be made to the Professional Ethics Guidance Team.

4.2 Withdrawals of funds in excess of £50

For the withdrawal of balances in excess of £50 per client you must always seek SRA approval under rule 20 (1)(k) 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. The SRA may also require that your accountant provides a letter of verification (see 4.3.1).

Applications for authorisation under rule 20 (1)(k)SAR should be made to the Professional Ethics Guidance Team, who can advise on the criteria which must normally be met for authorisation to be given.

The SRA asks that one application be made for all outstanding balances on client accounts above the sum of £50. As a matter of good practice, you should attend to outstanding balances on an annual or six monthly basis.

4.3 Information required by the SRA

Although each case is different, when applying for authorisation for the withdrawal of funds in excess of £50 it is common for the SRA to ask you to provide the following in most cases:

  • 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 which has elapsed since the money became due to the client(s) or other proper recipient(s).
  • A letter from your firm's accountants, confirming the sum of money and the period for which it has been held. The accountants should also confirm they are satisfied that
    • (a) the money referred to is held on behalf of the particular client(s) or other proper recipient(s) whom the firm has been unable to trace; or
    • (b) that the proper destination of the money cannot be identified.
  • 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 6).

The SRA may not always require that you provide an accountant's letter. A letter may not be requested where, for example, the circumstances do not appear to warrant it, or the cost of the accountant's letter is excessively high in relation to the money held.

Note: Any monies 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 under rule 22(1)(h).

4.3.1 Accounting duties

Your reporting accountant must check (on a sample basis) that the procedural side of the rule 20(2A) requirements have been executed appropriately in relation to record-keeping. Under rule 26 SAR, your accountant is also required to report on any substantial departures from the guidelines discovered whilst 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.

4.3.2 Steps to locate your client

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, they may ask for documents relating to searches that you have carried out to be forwarded to their offices.

If you are unable to trace clients or beneficiaries the Department of Work and Pensions (DWP) offer a letter forwarding service. However, the DWP will not forward on bills of costs to clients.

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 below highlights some of the key steps you should take before submitting an application to the SRA:

Name of client: Ref: Amount:

 

How long have funds been held?

  

Step to be taken

Yes / No

If no, why not appropriate

Have you written recently to all known addresses?

  

Is the file available to be checked?

  

Has the client been telephoned on all numbers on the file?

  

Have you made attempts to contact the client via third parties? E.g. family member, employer or bank.

  
Have you checked the telephone directory?  

Have you checked the electoral roll? If there are only a small number of matching names in the appropriate region, you should write to all of them to trace the rightful owner of the money.

  

Have you carried out an internet search against the client's name?

  

Have you considered the letter forwarding service at the Department for Work and Pensions?

  

Have you placed a newspaper advert?

  

Have you instructed enquiry agents?

  

In estate matters, are you in contact with the executors?

  

Have you taken any other steps?

  

4.3.3 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.

Out-of-pocket expenses 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.

5. Preventative measures

Agreeing at the outset about how surplus funds will be disposed should help prevent future problems developing. This can be done by including information in the client care letter about what will happen to monies in instances where clients cannot be traced after 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).

6. Donating funds to charities

The SRA may impose a condition that you pay unclaimed client funds to a charity which provides an indemnity against any legitimate claim subsequently made for the sum received. If your chosen charity will not provide an indemnity, you should make suitable insurance arrangements yourself.

If a situation arises where your client can be traced but fails to cash a cheque or to give instructions but 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 unless you hear to the contrary within a stated period of time.

Alternatively, you may telephone clients to seek their consent to donate the balance, 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.

The Law Society Charity, The Solicitors Benevolent Association and The Access to Justice Foundation are 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 online guides on their respective websites.

7. More information

7.1 Information required by the SRA

7.2 Further products and support

7.2.1 Practice Advice Line

The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 020 7320 5675 from 09:00 to 17:00 on weekdays.

7.2.2 Law Society publications

7.2.3 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.

7.2.4 Professional Ethics Team

For general advice, call 0370 606 2577 between 9:00 to 17:00 on weekdays. You can also write to Solicitors Regulation Authority, Professional Ethics, Ipsley Court, Berrington Close, Redditch B98 OTD. DX 19114 Redditch.

7.2.5 Department of Work and Pensions

Contact WP Letter Forwarding Service Durham House, Washington, Tyne and Wear NE38 7SF, or go to www.dss.gov.uk/cru.

7.2.6 SRA Resolution Team

Email: resolutionteamenquiries@sra.org.uk or call 0370 606 2555.

 
 
 

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