In short
The most common SRA Accounts Rules breaches are using client account as a banking facility, holding residual balances after a matter ends, late transfers and allocations, and shortfalls caused by paying out more than a client holds. Rule 6.1 requires every breach to be corrected promptly and any missing money replaced immediately. Serious breaches must be reported to the SRA promptly, and every breach should be recorded.
Key takeaways
- Rule 6.1 requires breaches to be corrected promptly once discovered, and money improperly withdrawn or withheld to be replaced in client account immediately.
- The SRA's 2024 warning notice says managers must replace a client account shortage from their own resources if necessary, whether or not they were personally at fault.
- Using client account as a banking facility breaches rule 3.3 even where there is no evidence of money laundering.
- Residual balances of £500 or less per matter may be paid to charity without SRA approval if the prescribed conditions are met; larger balances need the SRA's written authority.
- The COFA must ensure that serious breaches of the Accounts Rules are reported to the SRA promptly, and firms must keep records that show their compliance.
What counts as a breach and the duty to correct it
Any failure to meet a requirement of the SRA Accounts Rules is a breach, from a ledger posted two weeks late to a payment made with another client's money. The rules do not grade breaches; the SRA's Enforcement Strategy does that when it decides what action to take. What every breach shares is the duty in rule 6.1 to correct it promptly once found, and to replace immediately any money improperly withdrawn or withheld from client account.
Because the firm's managers are jointly and severally responsible for compliance under rule 1.2, a breach on one partner's matter is a breach for the whole partnership. For the full set of rules, see our guide to the SRA Accounts Rules.
The most common breaches and how to correct them
Reporting accountants and SRA inspections find the same issues year after year. Most arise from slow processes rather than dishonesty: money left on ledgers after matters close, costs not transferred after billing, receipts not split between client and business account, and payments released before funds had cleared.
The table sets out each common breach, the rule it engages and the correction the rules require.
| Breach | Rule | Example | Correction |
|---|---|---|---|
| Residual balance not returned | 2.5 | £640 left on a closed purchase ledger for 18 months | Trace and repay the client; follow the residual balance route if they cannot be found |
| Client money held in business account | 2.3, 4.1 | A payment on account banked to the office account | Transfer it to client account immediately and record the breach |
| Mixed payment not split | 4.2 | A receipt covering a paid bill and future disbursements left entirely in client account | Allocate each part to the correct account promptly |
| Costs taken before a bill | 4.3 | Fees transferred to office account before a bill or written notice was sent | Return the money to client account until a bill is delivered |
| Client ledger overdrawn | 5.3 | A completion payment released before the buyer's funds cleared | Replace the shortfall from business money immediately |
| Withdrawal not authorised | 5.2 | A transfer released by someone without approval authority | Review the payment, confirm it was proper, and fix the approval control |
| Banking facility | 3.3 | Paying a client's personal bills from client account | Stop the payments, return the funds and consider reporting |
| Late reconciliation | 8.3 | No reconciliation for seven weeks | Complete it, resolve differences and fix the timetable |
Using client account as a banking facility
Rule 3.3 forbids using a client account to provide banking facilities to clients or third parties. Money may pass through client account only where there is a proper connection to regulated legal services the firm is delivering. The SRA's warning notice explains that having a retainer is not enough: the payment itself must be part of the legal work. It says a breach does not require any evidence of money laundering, and that the absence of laundering is no defence.
The warning notice lists the signs. Requests to receive or pay money with no clear purpose, payments to family members or companies, especially overseas, that the client could make directly, transfers between ledgers without evidence of why, routine household payments, and a client's convenience or lack of a UK bank account offered as the reason. Holding money after a transaction has completed can breach both rule 3.3 and rule 2.5. Where a client genuinely cannot hold funds, the notice points to a third party managed account or escrow service instead.
Shortfalls: replace first, explain afterwards
A shortfall means the client account holds less than the firm owes its clients, usually because a payment was made for a client who did not have enough money held, a payment went to the wrong recipient, or money was stolen or misused. The SRA's warning notice, published in June 2024, says missing money must be replaced in full, immediately and with extreme urgency.
The notice makes four practical points. The managers are jointly and severally responsible for replacing the shortage and must use their own resources, even a loan, if needed. It is irrelevant that the fault may not lie with them personally. Waiting for an insurer to pay is not an option, and a firm that does not replace the money promptly is at serious risk of SRA intervention. Costs should not be taken from client account until the shortage is replaced. The client account reconciliation guide shows how shortfalls first appear as debit balances.
Residual balances and withdrawing them
A residual balance is money left on a client ledger after the matter has ended. Rule 2.5 requires client money to be returned promptly once there is no longer any proper reason to hold it, and they are among the breaches reporting accountants find most often. In its 2026 client money consultation the SRA decided not to set fixed deadlines for returning money, and said it would strengthen its guidance on what 'promptly' means and treat return of client funds as a priority.
Where the owner cannot be found, the SRA's prescribed circumstances allow a balance of £500 or less on any one matter to be paid to a charity of the firm's choice without applying to the SRA, provided the firm has taken reasonable steps to return it, records those steps and keeps the records for at least six years, keeps a central register of each payment, obtains the charity's receipt and an indemnity, and does not deduct tracing costs. For more than £500 on a matter, the firm needs the SRA's written authority. SRA guidance says it expects at least use of the Department for Work and Pensions letter forwarding service and free internet searches, and will usually require payment to charity with any interest due and an indemnity from the charity that is not time limited.
| £500 or less per matter | More than £500 per matter | |
|---|---|---|
| SRA approval | Not needed if the prescribed circumstances are met | SRA written authority required before withdrawal |
| Steps to trace | Reasonable steps, more intensive for larger or recent balances | Evidence of steps taken, at least the DWP letter forwarding service and free internet searches |
| Where the money goes | A charity of the firm's choice | Usually a charity, including any interest due |
| Indemnity | Confirmation of any indemnity from the charity | Indemnity from the charity that is not time limited |
| Tracing costs | Must not be deducted from the balance | May be allowed once authority is granted, not deducted beforehand |
| Records | Central register: owner, amount, charity and number, date; kept six years | Application and decision kept with the matter records |
When a breach must be reported to the SRA
Paragraph 3.9 of the SRA Code of Conduct for Firms requires a firm to report promptly any facts or matters it reasonably believes are capable of amounting to a serious breach of the SRA's rules, and paragraph 3.10 requires it to tell the SRA promptly of anything the SRA should know about to investigate. Paragraph 9.2 puts the same duties on the COFA specifically for the Accounts Rules. The SRA's guidance says that once a firm decides it must report, it should do so as soon as possible.
The Enforcement Strategy explains how the SRA judges seriousness: the harm or potential harm, the number of people affected, the level of any loss, and whether the conduct was deliberate or dishonest. It always treats misuse of client money and use of client account as a banking facility seriously. At the other end, it gives the example of a COFA who finds that residual balances have not been paid and puts an action plan in place, where the SRA may agree a compliance plan rather than take formal action. The SRA's missing money notice says a firm that identifies a shortage should report it.
Keeping a breach register
The 2019 rules do not prescribe a breach register, but paragraph 2.2 of the Code of Conduct for Firms requires firms to keep records that demonstrate compliance, and SRA guidance for reporting accountants names the breaches register and the COFA's review as controls to test. A register is also the only practical way to show the SRA that a breach was found, fixed and not repeated.
A useful register records the same fields for every breach, so the COFA can see patterns: the same fee earner, the same matter type or the same control failing. A reconciliation break log uses a very similar structure.
| Field | What to record |
|---|---|
| Date found and how | Reconciliation, file review, accountant's testing or client complaint |
| Rule breached | For example 5.3 or 2.5 |
| Matter and amount | Client ledger reference and sum involved |
| Cause | The underlying reason, not only the symptom |
| Correction and date | What was done to put it right, and when |
| Money at risk | Whether client money was or could have been lost |
| Reported to the SRA | Yes or no, with the COFA's reasoning |
| Control change | What was changed to stop it happening again |
Worked example: a quarter's breach register
A 40-partner regional firm records four breaches in a quarter. The COFA corrects each, decides which are serious, and records the reasoning. Only one, a client ledger overdrawn by a misdirected payment that took nine days to recover, involves money that was at risk, and the COFA reports it after replacing the money the same day it was found.
The same review finds two residual balances. One of £320.00 has been on a closed will matter for four years and the client cannot be traced; after reasonable tracing steps the firm pays it to charity under the prescribed circumstances. The other, £1,450.00 on a sale matter, is above £500, so the firm applies to the SRA for authority with evidence of its tracing.
| Breach | Rule | Amount (GBP) | Correction | Reported to SRA |
|---|---|---|---|---|
| Payment on account banked to office account | 2.3, 4.1 | 1,800.00 | Transferred to client account the next morning | No: corrected promptly, no money at risk |
| Fees transferred before bill sent | 4.3 | 2,400.00 | Returned to client account; bill sent, then transferred | No: corrected promptly, no loss |
| Payment sent to wrong account, ledger overdrawn | 5.3 | 18,750.00 | Shortfall replaced from business money the same day; funds recovered after nine days | Yes: client money was at risk |
| Reconciliation completed in week seven | 8.3 | Not applicable | Completed; timetable and cover arrangements changed | No: administrative, not repeated |
| Residual balance, closed will matter | 2.5 | 320.00 | Paid to charity under prescribed circumstances | Not required |
| Residual balance, closed sale matter | 2.5 | 1,450.00 | Application made for SRA authority | Application to the SRA |
Controls that prevent breaches
Most breaches are prevented by four controls: reconcile far more often than every five weeks so differences are found while they are small; never release a payment until the client's ledger shows cleared funds; review matters for closure and refund within days of completion; and give release authority only to named people with limits. Firms that rely on spreadsheets for any of these face the risks set out in our guide to spreadsheet reconciliation risk.
Safeheld reconciles client money every day for regulated firms, works every difference to its cause and keeps the record auditors ask for, and is extending that work to law firm client accounts. If your firm holds client money under the SRA Accounts Rules, talk to us about SRA client money.
Frequently asked questions
What are the most common SRA Accounts Rules breaches?
Residual balances not returned, client money held in the office account, costs taken before a bill, mixed payments not split, overdrawn client ledgers and use of client account as a banking facility.
Do I have to report every Accounts Rules breach to the SRA?
No. Serious breaches must be reported promptly under the Code of Conduct for Firms. Minor breaches that are corrected should be recorded, and the firm should be able to explain why it did not report them.
What can I do with a residual client balance I cannot return?
If it is £500 or less on a matter, you may pay it to charity without SRA approval if you meet the prescribed conditions. Above £500 you need the SRA's written authority.
Who has to replace a shortage on client account?
The firm's managers, who are jointly and severally responsible. The SRA's warning notice says they must replace it immediately, from their own resources if necessary.
Is it a breach if no money laundering took place?
Yes. Using client account as a banking facility breaches rule 3.3 regardless of whether there is any evidence of laundering.
Does the SRA require a breach register?
The rules do not name one, but firms must keep records that demonstrate compliance, and reporting accountants test the breaches register as part of their work.
References
- SRA Accounts Rules
- SRA Code of Conduct for Firms
- SRA warning notice: Improper use of client account as a banking facility
- SRA warning notice: Money missing from client account
- SRA: Withdrawing client money in prescribed circumstances
- SRA guidance: General granting authority to withdraw residual client balances
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.