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Client money and office money — SQE1 Accounts question

A worked single-best-answer question on client money and office money, with why each wrong option is wrong — the way SQE1 traps candidates.

Client money and office money

Quill Legal Ltd is a small SRA-authorised firm offering fixed-fee employment advice. It does not operate a client account. Before starting work for a new client, Mr Brand, it asks him for £900 as its fixed fee and £300 for a medical expert's report, which the firm has contracted with the expert to obtain and is liable to pay. The firm told Mr Brand in writing, before he paid, that these sums would be held in its business account. The firm never handles any other client money.

Which of the following best describes where Quill Legal may hold the £1,200?

  1. AIt may hold the whole £1,200 in its business account, because it holds only fees and disbursements for which it is liable, it has no other reason to have a client account, and it told Mr Brand in advance.
  2. BIt must open a client account, because all money received in advance for fees is client money that must be paid into a client account.
  3. CIt may hold the money in its business account only if Mr Brand has signed a written agreement consenting to that arrangement.
  4. DIt may hold the £900 in its business account, but the £300 for the expert's fee must be paid into a client account.
  5. EIt may hold the money in its business account only because the total is below £10,000.
Show answer and reasoning
A is the best answer. Under rule 2.2 of the SRA Accounts Rules, where the only client money a firm holds is money for fees and unpaid disbursements before a bill is delivered, the disbursements are ones for which the firm is liable, and the firm does not need a client account for any other reason, it may hold the money outside a client account. It must tell the client in advance where and how the money will be held. Quill Legal satisfies each condition.

Rule: A firm whose only client money is advance fees and disbursements for which it is liable, and which has no other need for a client account, may hold that money outside client account if it tells the client in advance.

  • B Rule 2.2 provides an exception for firms that hold only advance fees and disbursements for which they are liable. (wrong rule)
  • C Rule 2.2 requires that the client is informed in advance, not that the client signs a written consent. (wrong rule)
  • D The firm is contractually liable for the expert's fee, so the £300 falls within the rule 2.2 exception. (right rule, wrong facts)
  • E £10,000 is relevant to the accountant's report exemption; rule 2.2 has no monetary threshold. (wrong rule)

Source: SRA Accounts Rules 2019, rr 2.1(d) and 2.2

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