Breaches of the SRA Accounts Rules — SQE1 FLK2 Solicitors Accounts

A solicitor arrives on Monday to find the client account was £800 overdrawn over the weekend. A payment went out on the Friday before the client's own funds had arrived. Office money goes in on Monday morning and the account is back in credit before anything else is paid. It is the only overdraft the firm has had, and everyone understands how it happened. A colleague insists it must be notified to the SRA within twenty-four hours. Must it?

No. And not because twenty-four hours is the wrong number. Because there is no twenty-four hour rule at all, and there never has been. This is Breaches of the SRA Accounts Rules, and almost every question in it turns on one word, which is materiality. Keep that Monday morning in mind.

Here is the route. What counts as a breach, and why what you knew about it makes no difference. Then materiality, which decides who has to be told. Then the breaches that come up most, and the entries that put them right. Then reporting: internally, externally, and when the duty is yours personally rather than the firm's. And finally what it costs you if you get it wrong.

Start with what a breach actually is. Any failure to comply with any requirement of the SRA Accounts Rules 2019. That is the whole definition. It covers the obvious, like taking client money for yourself, and the invisible, like posting a receipt to the wrong ledger.

And here is the first thing candidates get wrong. It makes no difference whether you knew. A breach is a breach regardless of knowledge or intention. What your state of mind changes is how seriously it is treated. An unknowing breach shows negligence. A knowing breach shows disregard for the rules, and knowing about one and doing nothing compounds it.

So if every failure is a breach, what separates the ones you must report? Materiality. And there is no fixed definition and no monetary threshold, which is exactly why it gets examined. The questions to ask are these. Did it affect the client? Does it reveal a systemic failure? Is it capable of amounting to a serious breach?

That last phrase is the one that matters, because it is the actual test. Paragraph 3.9 of the SRA Code of Conduct for Firms is where it lives. A firm must report promptly any facts or matters that it reasonably believes are capable of amounting to a serious breach. Not every breach. Serious ones.

Which is why our Monday overdraft need not be reported. One occurrence, understood, corrected out of office money on the first working morning, affecting nothing else. That is not material. But do not mistake what that means. It still has to be recorded in the firm's breach register. Non-material does not mean invisible. It means internal.

Now change one fact and watch the answer move. Over six months a firm's client account goes overdrawn three times. Each one is small, none over £500, each put right within a day. Nobody can explain how any of them happened, and nothing has been changed about how payments are checked. The COFA has recorded all three and treated each as non-material. Is he right?

No. Materiality is not measured one breach at a time. Three unexplained overdrafts in six months, with no change to the controls that let them through, is evidence of a systemic weakness. Breaches that are individually trivial can be material collectively, and that is the point at which the pattern becomes capable of amounting to a serious breach. Look at them together, not separately.

Now the breaches themselves, starting with the most fundamental. Client money must be kept separate from office money, which is rule 4.1. Paying office expenses out of the client account breaches it. So does leaving office money sitting in the client account, which is what happens when a client pays a bill you have already delivered and nobody moves the money across.

Then there is the one that ends careers. A client account is for holding client money, not for providing banking services. So consider this. A long-standing corporate client has had its business account closed by its bank. The finance director asks whether the company can route its supplier invoices, wages and rent through your client account. He offers a fee and to put the instruction in writing. There is no matter in progress. Can you?

No, and it is not a close question. That is providing a banking facility through a client account, and it is prohibited outright. The written instruction does not help. The fee makes it worse. And the absence of any underlying legal work removes the only thing that could have justified holding the money at all.

Reconciliation next. You must reconcile the client bank account with your cash book and the client ledger balances at least every five weeks. Miss it and that is a breach in itself. But the real damage is that until you have reconciled, you do not know whether client money is missing. Late reconciliation is how other people's breaches stay hidden.

Then promptness. Client money must be returned promptly once there is no proper reason to hold it, which is rule 2.5. There is no grace period for administrative convenience. The money is not yours. And where a small balance is left behind and the client cannot be traced, rule 5.1, paragraph c, allows withdrawal in prescribed circumstances. Those include paying a residual balance of £500 or less to charity, provided reasonable steps to trace the owner have been taken and recorded.

Withdrawals generally need proper authority. Taking costs that have not been agreed is an unauthorised withdrawal. So is transferring for a bill the client is actively disputing, even where you genuinely believe you have earned the money. It looks like misappropriation from the outside, whatever it felt like from the inside.

So you have found a breach. What now? Correct it promptly, and promptly means immediately, not after the current matter finishes. Where there is a shortage on the client account caused by the firm's error, the firm makes it good out of its own office money. That is rule 6.1, and the important word in it is own.

Which brings the cardinal sin of this whole topic. You never correct a breach by committing another one. A firm is £1,500 short on one client's matter and has another client with a healthy balance sitting in the same pooled account. Moving £1,500 across leaves the account total unchanged and can be reversed later. It is also using one client's money for another, which is a fresh and far more serious breach.

That principle has a corollary you should be able to spot instantly. A client ledger must never show a debit balance. If a ledger is £800 in debit, the firm has paid out £800 more than it held for that client, which means it has spent £800 of other clients' money. That is a shortage, and it must be replaced from office money at once.

And notice what does not save you. The pooled client account may still be comfortably in credit overall. That is irrelevant. The test is applied client by client, on each ledger, not to the account as a whole.

The extreme version has a name. Teeming and lading: shuffling money between matters so that whichever ledger anyone happens to look at appears to balance. That is not cash-flow management. It is a rolling concealment of a real shortage, each transfer misuses a client's funds, and the purpose of hiding a deficit strongly suggests dishonesty. It is reportable, and it is the kind of thing people are struck off for.

One more principle about correction, and clients try this on. A firm overdrew a matter by £1,200 and has properly made it good from office money. The fee earner wants to recover that £1,200 by adding an adjustment to the client's next bill, or taking it out of interest otherwise due. Can the firm?

No. The shortage was the firm's own mistake, so the firm bears the cost of putting it right. Not by a bill, not by a deduction from interest, not by halves. The client should be no worse off for the firm's error, and making the correction a cost to the firm is exactly the point of the rule.

Now the entries, because this is Solicitors Accounts and the direction of travel is the exam. One rule governs everything here. Money arriving in a bank account is debited. Money leaving is credited. Every transfer between two of the firm's own accounts therefore produces one debit and one matching credit, moving in opposite directions.

Apply it forwards. Office money paid into an overdrawn client account: it arrives in client bank, so debit client bank, and it leaves office bank, so credit office bank. So hold this one. A firm restores £2,000 to an overdrawn client account, and its cashier says both bank balances should move the same way. It comes back at the quick check.

Now apply it backwards. Office money wrongly sitting in the client account, say a bill already delivered and paid, has to come out. It leaves the client bank, so credit client bank. It arrives in the office bank, so debit office bank. And note what you do not do. Nothing goes on any client ledger, because that money was never held for a client.

Reporting now, and there are two audiences. Internally first. Tell your COFA, the Compliance Officer for Finance and Administration, immediately, not at the next monthly meeting. The COFA advises on whether it goes further. And if the COFA is away, you do not sit on it until they are back. You escalate to whoever is covering.

Externally, the firm reports to the SRA where the matter is capable of amounting to a serious breach, and it reports promptly. Do not wait until you have fully investigated. Report what you know now and update later. And there is no time limit running the other way either. Discover a breach from three years ago that should have been reported and was not, and you report it now.

And here is the point most people miss, because they assume reporting is somebody else's job. The duty can be yours personally. Suppose a firm and its COFA decide not to report a material breach that plainly ought to be reported. An employed solicitor's own professional duty is not discharged by the partners' decision. She must report it to the SRA herself.

Finally, consequences, briefly, because they explain everything above. The SRA can advise, warn, rebuke or fine. Serious cases go to the Solicitors Disciplinary Tribunal, which can impose unlimited fines and, where client money has been misappropriated, strike a solicitor off the roll. And failing to report is treated more seriously than the breach you failed to report.

A word on how SQE1 tests this. There are no cases in this topic at all, which is worth knowing in itself. Nothing here rests on an authority you have to name. It is rules, principles and the direction of a double entry, and you get a set of facts, five answers and one job, which is to pick the best one.

So if you keep only three things, keep these. Materiality decides reporting, and there is no fixed threshold and no fixed deadline. A shortage is made good out of the firm's own money, promptly, and never out of another client's. And money arriving is debited, money leaving is credited, which answers every entries question you will be asked.

Four traps. One: non-material does not mean nothing to do. It still goes in the breach register, and the register is where a pattern becomes visible. A firm that records nothing cannot tell the SRA, or itself, whether the same thing keeps happening.

Two: correcting a breach does not make it unreportable. Putting the money back is what you were obliged to do anyway. It is a mitigating factor, not an eraser, and if the breach was serious it still goes to the SRA. Three: the pooled account being in credit proves nothing. Materiality and shortage are tested on the individual client ledger.

Four: a written instruction cannot licence a prohibited act. A client asking in writing to run its trading through your client account, and offering to pay for the privilege, does not turn a banking facility into a permitted one. Consent is irrelevant where the rule is an outright prohibition.

Quick check, and you were told to hold this one. A firm's client account is £2,000 overdrawn, because £2,000 was transferred out of it to the office account in error. The firm now transfers £2,000 back from office to client. It keeps a cash book with separate client and office columns. The cashier says both bank balances should move in the same direction. Which entries are right?

Three candidate answers. One: debit the client bank and credit the office bank. Two: credit the client bank and debit the office bank. Three: debit the client bank and debit the office bank, since the firm is replacing its own money. Pause here if you want a moment.

The answer is one. Debit the client bank, credit the office bank. The £2,000 arrives in the client account, and money arriving is debited. It leaves the office account, and money leaving is credited. The client's own ledger is credited too, restoring the balance held for him, and the money has to come from office funds because the shortage was the firm's error.

Why the others fail. Two is the same transfer running the wrong way, which would take money out of the client account and deepen the overdraft. Three is the cashier's mistake: a single transfer between two of the firm's own accounts always produces one debit and one matching credit. Two debits is not a transfer at all.

Five things to take away. One: a breach is a breach whatever you knew, though what you knew affects how it is treated. Two: reporting turns on materiality and on whether the matter is capable of amounting to a serious breach, not on any fixed deadline or figure. Three: repetition makes trivial breaches material, so look at them together.

Four: correct promptly, out of the firm's own money, and never by using another client's. Five: money arriving is debited and money leaving is credited. And that £800 Monday overdraft goes in the breach register and no further, unless it happens again, at which point the answer changes entirely. Next time, Records, Ledgers and Reconciliation.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.