Joint Accounts and Third-Party Accounts — SQE1 FLK2 Solicitors Accounts

A firm acts for two clients buying a house together. Each sends £40,000 towards the deposit, and the firm holds the £80,000 until exchange. Both want to be able to see, at any moment, what has come in from them and what the firm holds for them. A trainee says the only way to do that is to open a separate bank account at the bank for each client. Is he right? No. One account will do.

Because it is the ledger that keeps one client's money apart from another's, not the bank account. Hold on to that, because this whole topic is about which record does the work when the money is not in the ordinary place. This is Joint Accounts and Third-Party Accounts.

Here is the route. First, the two quite different things people call a joint account. Then money held for several people in your own client account, and the mandate that governs paying it out. Then rule 9 joint accounts proper. Then a client's own account under rule 10. Then third-party managed accounts under rule 11. And finally, how you record money you never actually hold.

Start with the confusion, because the whole topic turns on it. Two quite different arrangements get called a joint account, and you have to tell them apart.

The first is a rule 9 joint account under the SRA Accounts Rules 2019. Your firm holds or receives money jointly with somebody else: the client, another law firm, or a third party. So the account is in joint names, and not in your firm's sole name.

The second is nothing of the kind. Your own client account, in your firm's sole name, holding money for two or more people at once. A couple selling a house. That is an ordinary client account, and calling it a joint account is where candidates go wrong.

Take the second one first, because it is far the more common. Money held in your client account for two or more people is simply client money, and the whole of Part 2 applies to it. There is no separate regime and no special sort of account.

Which means the full list. The money goes into the client account under rules 2.3 and 4.1. Each person it is held for gets a ledger of their own under rule 8.1(a), identified by name with a description of the matter. The account is reconciled every five weeks under rule 8.3. And a payment out needs instructions under rule 5.1(b).

So back to our two buyers. The £80,000 sits in the general client account, and each client's £40,000 is recorded on that client's own ledger. Ask what the firm holds for either of them and the ledger answers instantly.

A single ledger in their joint names would not do it, because it would not show what is held for each of them individually. A separate designated bank account may be opened where there is a reason for one. It is not required here, and a general client account routinely holds money for many clients at once.

Now a point that surprises people. Nothing says everyone whose money sits in your client account must be your client. Rule 2.1(b) makes money held on behalf of a third party, in relation to regulated services you deliver, client money. It gives money held as agent, as stakeholder, or to the sender's order as its examples.

So where a client's friend contributes to a purchase, that money can be held, and it goes on a ledger of its own in the friend's name. What matters is not whose client it is. It is rule 3.3: whatever goes into or out of the client account must relate to the regulated services your firm delivers.

Which is the banking facilities trap. A client who asks you to take in £40,000 that has nothing to do with any work you are doing gets a no. So does a request to park £200,000 with another firm that delivers no regulated services in the matter. That is not what a client account is for.

Next, the mandate, which is where joint holdings actually go wrong. Rule 5.1(b) allows a withdrawal only on instructions from the client, or the third party, for whom the money is held. Rule 5.2 requires you to authorise and supervise transactions and instructions appropriately.

No rule prescribes a particular document, so settle it yourself, in writing, before the money arrives. Whose instructions release it. Whether either may instruct alone or both signatures are needed. How signatures are obtained. And what happens if they disagree.

Try one. A firm holds £25,000 of net sale proceeds for two clients who owned a property together. Both signed an authority saying any payment out needs the written signature of each of them. One rings up and asks for £12,500 today, saying the other agreed in a conversation last night. Pay it?

No. One client's report of what the other said is not an instruction from that other client. The mandate calls for her signature and the firm has heard nothing from her. Decline, and ask both to confirm in writing.

And note the position where the mandate does allow either to instruct alone. That is fine as far as it goes. But once you are on notice that the other disputes a particular payment, you should not rely on the sole-instruction mandate for that payment.

Where they genuinely disagree, do not take sides. Hold the money, follow your written authority, and if they cannot agree, apply to the court for directions. A written authority which says in terms that you hold until they agree or a court directs is doing exactly its job.

Two recording points before we leave ordinary client money. Costs transferred to office must be allocated between the clients according to the retainer. Equally, in proportion to their interests, or all to one of them, and whichever it is, document it.

And distributions follow entitlement, not instinct. Two spouses splitting net proceeds equally take half each. Tenants in common in unequal shares do not. On £150,000 of net proceeds, the 60% owner takes £90,000 and the 40% owner £60,000, each figure landing on that client's own ledger.

Now the real rule 9 joint account. A joint account is not a client account, for one simple reason. A client account must be in the sole name of the firm, and this one is not. But the money in it is still client money. Those are two separate questions.

Rule 9 applies where, acting in a client's matter, you hold or receive money jointly with the client or a third party. Part 2 then does not apply, save for two survivors. Rule 8.2, statements at least every five weeks. And rule 8.4, the central record of bills and other written notifications of costs.

Read what that leaves out. No rule 8.1 client ledger requirement. No rule 8.3 five-weekly reconciliation. Which is precisely the practical difference from money held for two clients in your own client account, where both of those duties apply in full.

The SRA's own example is a solicitor named as executor jointly with a lay executor, with the estate money in an account in their joint names. Another is a retention held in the joint names of the two firms acting on a deal. The SRA also expects a central register of the joint accounts your firm holds or operates.

Rule 10 does something similar for a different arrangement: a client's own account. That is an account in the client's own name which your firm operates as signatory. The signatory role is the defining feature. The money stays in the client's account and never passes through yours, but you can move it.

Where does that arise? Where a solicitor holds a role giving access to the client's own account. Most often as attorney under a lasting or enduring power of attorney, or as a deputy appointed by the Court of Protection. So the client is typically someone who cannot manage their own finances.

Rule 10 also disapplies Part 2, but the list of survivors is longer. Rules 8.2, 8.3 and 8.4. Statements, reconciliations and the bills record. The reconciliation duty is the practical difference between rule 9 and rule 10, and it is the point to carry.

Why longer? Because you have control. As signatory you can move that client's money. That is why the statement, reconciliation and billing duties stay alive, and why rule 12.1 still requires an accountant's report for the period, subject to the usual exemptions. The client's vulnerability makes the records more important, not less.

One thing it is not. A client asking that their money not be paid into your client account at all is a different question, under rule 2.3. Client money goes promptly into a client account unless an exception applies. The third exception is an alternative arrangement agreed in writing, in the individual circumstances, with the person the money is held for.

That is a written arrangement about where money is held. A client's own account is about your firm operating an account as signatory. Do not run them together.

Third, the third-party managed account, under rule 11. It is an escrow-type account operated by a third party that is a regulated payment institution, authorised by the FCA, on terms agreed between the provider, you and your client.

Its defining feature is what it does to you. Using it does not result in you receiving or holding the client's money. The regulated provider holds and operates it. So it is one alternative to your firm holding client money itself, and the client-account obligations do not attach to those funds.

Which sets up a trap. Another professional, another solicitor or an accountant, who happens to hold money relating to your matter is not a third-party managed account. The label belongs to the regulated provider. That is simply somebody else holding funds, and you still have recording and due diligence obligations.

Before you accept instructions to use one, make sure the client actually understands the arrangement. The contract terms. Who bears the provider's fees. And what rights the client has if a dispute arises. That is not a formality, because the client is giving up the protection of your client account.

Then the duties that survive whoever holds the money. Know where your client's money is. Satisfy yourself that the third party is reliable and regulated, with appropriate safeguards. Tell your client who holds their money and what protections apply. And monitor the arrangement rather than setting it up and forgetting it.

Which bites hardest at the edges. An unregulated introducer asking to hold a client's deposit gets a no, unless you are satisfied the arrangement gives the client protection equivalent to a regulated holder. Absent that, you are exposing the client, and the fact that somebody else operates the account changes nothing about whose money it is.

Last, the recording question, and it catches good candidates. A client ledger is a record of your own dealings with client money. Rule 8.1(a) covers receipts and payments that pass through your hands. Rule 8.1(b) requires a list of the balances, with a running total. And rule 8.3 reconciles that total every five weeks.

Try this one. You sent your buyer's £50,000 deposit to the seller's solicitors, who hold it as stakeholder until completion. A trainee wants to put the £50,000 back on the buyer's ledger, so the file shows at a glance that it is still there. Do you?

No. You never received it. Entering it would inflate the ledger total, and the reconciliation would stop agreeing with the bank. Whose money it is does not determine what the ledger records. The ledger follows your own receipts and payments.

So keep a memorandum record instead. On the file, or in a schedule outside the client ledgers. That gives you the complete picture of the client's position without corrupting the figures that have to reconcile. The same goes for payments the third party makes: note them, but do not post them.

And keep two checks apart. The rule 8.3 reconciliation compares your ledger total, your cash book and your client account bank statement, all records of money you hold. Separately, rule 11.2 requires you to obtain regular statements from a third-party managed account provider and ensure they accurately reflect every transaction on the account.

Check those statements against your memorandum record and investigate any difference. If the provider says £30,000 and your record says something else, you take up the difference. You cannot simply assume the third party's records are correct.

A word on how SQE1 tests this. You will not be asked to recite a rule number. You get a scenario, five answers, and one instruction: pick the best. There is no case law here at all. This topic is one rulebook, and knowing which rule survives which arrangement is the whole game.

If you keep only three pegs. Rule 9, where a joint account is not a client account but the money in it still is. Rule 10, where you operate the client's own account as signatory and the reconciliation duty survives. And rule 8.1, where the ledger, not the bank account, keeps one client's money apart from another's.

Four traps. One: client money and client account are different questions. Money in a rule 9 joint account is client money even though the account is not, and cannot be, a client account. Answer options that run the two together are the wrong ones.

Two: rule 9 and rule 10 leave different things standing. Both disapply Part 2. Rule 9 keeps statements and the bills record. Rule 10 keeps statements, reconciliations and the bills record. The reconciliation is the difference, and it is where the question usually sits.

Three: a third-party managed account means a regulated payment institution. Another solicitor or an accountant holding funds is not one, however convenient the label. You still have to track the money and do your due diligence.

Four: never post money you do not hold. It inflates the ledger total and breaks the reconciliation. Keep a memorandum record on the file instead, and check it against the provider's statements.

Quick check. A partner is appointed executor of an estate jointly with the deceased's brother, a lay executor. The estate money sits in an account in the joint names of the partner and the brother. It is not in the firm's sole name, and none of it passes through the firm's client account. A trainee assumes that because it sits outside the client account, the Accounts Rules say nothing about it.

Which describes the money in that account? Three candidates. One: not client money, because the account is not in the firm's sole name. Two: client money, so every receipt and payment must go on a client ledger. Three: client money, though the account is not a client account, with statements and a record of bills still required. Pause here if you want a moment.

The answer is three. Money in a joint account is still client money, but the account cannot be a client account, because a client account must be in the firm's sole name. Rule 9 covers exactly this. It disapplies Part 2 save for rule 8.2, statements at least every five weeks, and rule 8.4, the central record of bills.

Why the others fail. Option one collapses two separate questions into one. Option two forgets that rule 9 disapplies rule 8.1, so there is no ledger obligation at all. That is exactly what separates a joint account from money held for two clients in your own client account.

Five things to take away. One: two things get called a joint account, and only an account in joint names is a rule 9 one. Money for several people in your own client account is ordinary client money, with Part 2 applying in full.

Two: our two buyers needed one bank account and two ledgers, because the ledger does the separating. Three: rule 9 leaves statements and the bills record only, while rule 10, for a client's own account you operate as signatory, also keeps the reconciliation.

Four: a third-party managed account is run by an FCA-regulated payment institution, and using it means you never hold the money. Five: money you do not hold never goes on a client ledger. Next time, Accountants' Reports and Record Retention.

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.