The Law Society issues Practice Note on residual client balances 

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The Law Society has recently published a practice note setting out the requirements and practical guidance for dealing with residual client balances. 

Whilst significant reform to the management of client monies by firms has been paused by the Solicitors Regulation Authority (SRA), there are still steps firms can implement to improve their processes now, ensuring they represent best practice and comply with anticipated reforms. 

The issue of residual balances has been the focus of the SRA for some time now. Rule 2.5 of the SRA Account Rules requires client money to be returned promptly as soon as there is no longer a proper reason to hold the funds. Whilst the SRA has proposed prescriptive deadlines for dealing with residual client balances, these proposals have yet to be implemented. 

Improve processes for holding client monies  

The practice note provides the following guidance for dealing with residual client balances: 

1. Track balances: Given the proposal to replace the ‘prompt’ requirement with a more prescriptive timeline, firms should consider adapting internal policies to track the duration of balances held more precisely. 

2. Keep in touch: It is advisable to contact clients in writing regularly – at least every 12 months – to advise them of the amount of client money held and the reason for retention. This should continue for the duration the client money is held. 

3. Review balances :Residual balances should be reviewed every six months as a minimum. 

4. Find clients: Reasonable attempts should be made to locate clients where necessary. The extent of the attempts should be considered by reference to the amount of client money held and the costs associated with tracing the owner of the funds. The practice note suggests the following additional methods, beyond the use of basic client information: 

• Contacting a client’s family members, employer or bank 
• Social media 
• Use of the electoral roll (provided there is a relatively low number of similar names in the area) 
• Internet search  
• Department for Work and Pensions letter forwarding service 
• Newspaper advert (if the balance is large) 
• Intelligence agents (if the balance is large) 
• Companies House (for corporate clients) 
• Search with the Probate Registry (for establishing personal representatives or executors for estate matters) 

The above methods will take time and may incur expense. Ideally, firms should consider how they can prevent the issue of residual balances arising in the first place. 

Client funds paid to charity  

The practice note also covers circumstances where client funds may be withdrawn and paid to charity. Whilst there is no current change in this area, the practice note indicates future reforms may include the introduction of digital application procedures and additional requirements for evidencing reasonable steps for balances greater than £500 (where SRA authorisation is required). This threshold itself may be revised should the SRA proceed with reforms. 

Records and monitoring  

Finally, firms holding client money above the threshold (an average balance on client account exceeding £10,000 and maximum balance exceeding £250,000 during the accounting period) need to obtain an accountant's report for any period in which they held or received client money.  

The Practice Note emphasises that, given the increased scrutiny on client money, firms should ensure residual balance monitoring is integrated with compliance and accounting systems. Should the SRA’s envisaged reforms proceed, auditable logs of communication efforts and financial handling will be vital. 

At Armstrong Watson we provide accountant’s reports for a number of practices. For many firms, the processes for dealing with residual balances are manual and time-consuming. Firms should consider the recommendations in the practice note and update their processes as appropriate to ensure compliance with rule 2.5 and reduce the risk of a qualified accountant’s report being submitted to the SRA.