Breaches and Special Accounts
A firm discovers that £4,000 meant for a client's house purchase has been sitting in the wrong ledger for three weeks, quietly overdrawn against another client's balance. The money itself is safe — no one has stolen anything — but for the moment, one client's ledger is subsidising another's without either client's knowledge or consent. This is the anatomy of a breach: not usually theft, but a failure of the ring-fence that keeps client money segregated, traceable, and available on demand. What happens in the hours and weeks after that discovery is what this topic is really about.
SRA Accounts Rules 2019, Rule 6.1: "You correct breaches promptly upon discovery."
Rule 6.1 is deliberately unforgiving in its simplicity. It does not ask whose fault the breach was before the duty bites, and it does not tolerate a "we'll deal with it at the next reconciliation" attitude. The obligation to remedy falls on the person who caused or discovered the breach and on every manager of the firm — a wide net that means a breach cannot be someone else's problem simply because you didn't create it. If you are a manager and you learn client money is missing, the rule expects you to act, not to wait for the responsible fee earner to notice.
That breadth has teeth. Managers of a firm are jointly and severally responsible for replacing any shortage on client account — meaning the SRA (and the client) can look to any one manager for the full amount, not a pro-rata share, leaving the managers to sort out contribution between themselves afterward. Practically, this means the firm must ensure any missing client money is replaced in full immediately, and if a particular manager caused the shortage, that manager carries a personal duty to replace it from their own resources — the firm's compliance failure does not get laundered into an insurance claim or a shrug. The same logic covers a subtler breach: money improperly withheld or withdrawn from client account (for example, an office-account disbursement paid from the wrong ledger) must be immediately paid into that account or otherwise replaced. Speed, not paperwork, is the rule's currency.
Every authorised firm must have a Compliance Officer for Finance and Administration (COFA), whose defined job is to take all reasonable steps to ensure the firm complies with the SRA Accounts Rules. The COFA is the person who should be reconciling breach reports against the rulebook and deciding what needs to happen next — but critically, not every breach needs to go further than internal correction.
Only serious or material breaches must be reported to the SRA. This is a judgement call, and the SRA has told firms what to weigh in making it:
- The amount of client money involved (a £4,000 shortfall reads differently from a £40 shortfall).
- Whether the client has suffered actual financial loss.
- Whether the conduct involved dishonesty.
- Whether the failure reflects a systemic control weakness rather than an isolated slip.
- Whether the breach is persistent or repeated.
Note what is not on that list: a single, small, promptly-corrected clerical error, with no loss and no dishonesty, will rarely meet the bar. The rules resist turning every human mistake into a regulatory event — but they escalate hard once dishonesty or systemic failure enters the picture.
Timing follows the same graduated logic. The SRA does not fix a specific number of days for reporting a material breach — there is no bright-line "72-hour rule" to memorise — but it expects notification to be made promptly. Where the breach involves dishonesty or actual client loss, "promptly" tightens into immediately: the firm is expected to notify the SRA at once rather than take time to gather full details first. In exam scenarios, treat dishonesty or client loss as the trigger that collapses "prompt" into "now."
Rule 8 is the engine room that makes breaches detectable in the first place. It requires a firm to keep accurate, contemporaneous, and chronological records of every dealing with client money — not reconstructed after the fact, not batched up weekly, but recorded as things happen. Sloppy or backdated records are themselves a rules breach, quite apart from anything they might be concealing.
Rule 8.3 — the three-way reconciliation: At least every five weeks, a firm must reconcile (1) the bank or building society statement balance, (2) the firm's cash book balance, and (3) the total of individual client ledger balances.
Think of these three figures as three independent witnesses to the same story. The bank statement says what the bank thinks is there; the cash book says what the firm's own accounting system thinks is there; the client ledgers say what each individual client is owed, summed together. If genuine reconciliation is happening, all three numbers agree. When they don't, something has gone wrong — a payment posted to the wrong ledger, a bank transaction not yet recorded, or worse, money that has actually gone missing. That is precisely why the check is three-way rather than a simple bank-to-books comparison: two matching figures can still both be wrong if a client ledger is affected while the cash book is not.
The reconciliation record must be signed off by the COFA or a manager of the firm — an accountability signature, not a rubber stamp, because the Solicitors Disciplinary Tribunal treats a missing or perfunctory sign-off as evidence the firm wasn't really watching its own controls. And any difference the reconciliation reveals must be investigated and resolved promptly — the reconciliation is worthless as a safeguard if discrepancies are noted and then left unexplained.
Rule 8 imposes one more discipline alongside reconciliation: under Rule 8.2, a firm must obtain statements from its banks, building societies, or other financial institutions at least every five weeks for every client account it operates — the same five-week clock as the reconciliation itself, so the two obligations march in step. And under Rule 8.4, before a firm transfers costs due to it from client account into office account, it must first give the client a bill of costs or other written notification of costs. This exists to stop a firm helping itself to client money under the guise of "costs owed" without the client having first been told what those costs are.
Most of the detailed machinery you've just learned — Rule 8's records and reconciliations chief among them — sits in Part 2 of the SRA Accounts Rules, which governs the firm's own client account. But solicitors sometimes handle client money through arrangements that aren't the firm's client account at all, and the rules carve out three special categories.
| Special account | What it is | Which Part 2 duties still apply |
|---|---|---|
| Joint account (Rule 9) | Firm holds/receives money jointly with the client or a third party — not in the firm's sole control | Obtain statements from the institution at least every five weeks; give a bill/written notification of costs before any transfer of costs |
| Client's own account, firm as signatory (Rule 10) | Firm operates the client's own personal bank account as signatory (e.g., under a power of attorney), rather than routing money through the firm's client account | Obtain statements every five weeks; carry out Rule 8.3 reconciliations; give a bill/notification of costs before transferring costs |
| Third-party managed account (Rule 11) | A TPMA receives payments from, or makes payments to, a client or third party instead of using the firm's client account at all | No Part 2 duties in the same sense — money passing through it isn't "client money" under the rules — but bespoke duties apply (below) |
Notice the pattern across joint accounts and client's-own-accounts: the firm has stepped outside its normal, tightly-controlled client account, so most of Part 2 is disapplied — but the rules refuse to let the firm off the hook entirely. Getting statements and being transparent about costs before helping yourself to money are treated as non-negotiable regardless of which structure is used; Rule 10 additionally keeps the Rule 8.3 reconciliation requirement, because a signatory on someone else's account still needs to prove the numbers add up.
Rule 10 exists for a narrow but real practical need: SRA guidance sets out circumstances in which a solicitor may properly act as signatory on a client's own account — most commonly where the client is vulnerable and the solicitor holds a power of attorney, so that bills can be paid or money managed without funnelling everything through the firm's client account first.
Rule 11 (TPMAs) is conceptually the odd one out: money in a properly-used TPMA is not treated as client money under the Accounts Rules at all, because the firm never has control of it in the way it controls its own client account. But "not client money" doesn't mean "no obligations." A firm using a TPMA must:
- Take reasonable steps to ensure the client is informed of and understands their rights and obligations regarding the account.
- Obtain regular statements from the account provider and check they correctly reflect the transactions.
- Maintain an overview of the transactions on the account and keep appropriate records.
The theme running through all three special accounts is the same: however money is structured, the firm cannot escape scrutiny, transparency with the client, and a paper trail — it can only shed the specific machinery (ledgers, five-weekly reconciliation) that assumes the firm itself is holding the money.
Reconciliation is the firm checking itself every five weeks; the accountant's report is an independent professional checking the firm once a year. A firm that holds or receives client money during an accounting period must obtain an accountant's report within six months of the end of that period — a report prepared and signed by an accountant who is a member of a recognised chartered accountancy body and who is, or works for, a registered auditor. This isn't a job for the firm's regular bookkeeper; it requires independent, qualified assurance.
Not every firm needs one every year. A firm is exempt if, during the accounting period:
Exemption thresholds: the average balance held on client account did not exceed £10,000, and the maximum balance held did not exceed £250,000 — or, separately, if all client money held or received came solely from the Legal Aid Agency.
The average and maximum are calculated from the same reconciliation data Rule 8.3 already generates, which is no accident — the exemption test rides on records the firm must keep anyway:
- Average balance = sum of all reconciliation balances for the period ÷ number of reconciliations.
- Maximum balance = the single highest balance recorded at any reconciliation during the period.
A firm handling modest, tightly-controlled sums (think: a small conveyancing practice with quick client-account turnover) may genuinely qualify for the exemption even while holding client money regularly, so long as neither threshold is breached. A firm that occasionally holds a large completion sum, even briefly, can blow through the £250,000 maximum test and lose the exemption for the whole period — the maximum test looks at the single worst (highest) moment, not the average pattern.
When a report is obtained, it is described as qualified when it identifies a failure to comply with the SRA Accounts Rules that places client money at risk — the accountant's way of raising a flag rather than issuing a clean bill of health. Only a qualified report must be delivered to the SRA, and it must reach the SRA within six months of the end of the relevant accounting period — the same six-month clock as obtaining the report itself, so a firm cannot sit on a qualified report indefinitely. Crucially, the obligation to deliver a qualified report to the SRA rests with the firm and its managers, not with the reporting accountant — the accountant's job ends at producing an honest, qualified opinion; escalating it to the regulator is the firm's own compliance duty, mirroring the same "managers carry the can" logic that opened this topic with Rule 6.1.
Every thread here traces back to one idea: client money is not the firm's money, and every structure — the ordinary client account, a joint account, a client's own account, a TPMA — is judged by how well it preserves that separation and lets someone independently verify it. Rule 6.1 handles the moment something goes wrong. Rule 8's records and five-weekly reconciliations are the firm's own early-warning system. The COFA and the materiality factors decide when the SRA needs telling, and how urgently. The special account rules show that stepping outside the ordinary client-account structure doesn't buy an exemption from transparency — only from the specific mechanics that assume the firm is holding the money itself. And the accountant's report is the once-a-year outside check that catches what five-weekly self-checks might miss, with its own threshold-based exemption for firms whose exposure is genuinely small. On the SQE1, expect scenario questions that ask you to spot which of these obligations is triggered by a given set of facts — a missing sum, a joint account with a family member, a TPMA supplier — rather than to recite the rule numbers in isolation.