Clients' money regulations

This helpsheet outlines the regulations governing the handling, banking and return of money held on behalf of clients, and provides a useful summary of the most commonly encountered problems and how to deal with them. It does not cover the requirements of the Financial Conduct Authority’s (FCA) Clients’ Money Sourcebook.

The regulations apply to all offices in the UK and Ireland of firms, and where there is a breach every principal will be responsible. View the Clients' Money Regulations. 

Where a firm is authorised by the Financial Conduct Authority (FCA) and holds Investment Business Clients’ Money, as defined by the FCA’s Sourcebook, then that money must be treated in accordance with the FCA’s Sourcebook.

Where a probate licensed firm holds money, this money should be dealt with in accordance with ICAEW’s clients’ money regulations, except that monies received in connection with authorised probate work must be kept separate from other clients’ monies.

Within this helpsheet the word ‘firm’ means:

1. a body corporate or partnership including a limited liability partnership which is wholly or partly composed of members of ICAEW engaged in public practice;
2. a member who is engaged in public practice as a sole practitioner; or
3. a person or body who is a firm regulated by ICAEW as a registered auditor or licensed under the designated professional body arrangements at the relevant time.

Members may also wish to refer to the following related helpsheet/guidance:

• Clients’ money regulation 8A guidance
• Clients’ money regulation compliance review checklist

Clients’ money is defined as:

• Money in any currency that a firm holds or receives for or from a client, including money held by the firm as a stakeholder and which is not immediately due and payable on demand to the firm for its own account.
• Money must be held in the same currency in which it was received unless the client has given written instructions to the contrary.

The following situations do not represent clients’ money for the purposes of the regulations:

• The control or use of a client’s own bank account by a firm, though the firm must ensure that:
  1. the client has given specific written authority that has been acknowledged by the bank before it exercises authority; and
  2. adequate records of the transactions that the firm undertakes are maintained.
• Fees paid in advance of work to be performed and that are clearly identifiable as such.
• A cheque received by a firm, drawn in favour of a client or third party.

In addition to the requirements of the Money Laundering Regulations 2017 (MLR 2017) to complete ‘risk-based’ Customer Due Diligence, including identification, verification and ongoing monitoring, the regulations require you to verify the identity of a client prior to holding money on that client’s behalf.

If you receive any monies, falling within the definition of clients’ money, you must immediately pay them into a client bank account. If your firm does not have a client bank account, then the regulations require it to open one.

A firm can maintain one or more client bank accounts with one of the organisations recognised in the regulations as a bank. On opening a client bank account, you must notify the bank in writing that:

• all money standing to the credit of that account is held by the firm as clients’ money and that the bank is not entitled to combine the account with any other account or exercise any right to set off or counterclaim against money in that account in respect of any money owed to it on any other account of the firm;
• interest payable on the money in the account must be credited to that account;
• the bank must describe the account in its records to make it clear the money does not belong to the firm; and
• the bank must acknowledge in writing that it accepts these terms.

If the client bank account is in the UK or Ireland and the bank does not provide written acknowledgement, you must withdraw all money from the account, close the account and deposit the money with another bank. If this is not possible then as a last resort you must return the money to the client.

If the money is to be placed in a client bank account outside the UK or Ireland, you must inform the client in writing of the country or territory where the money is to be held and the bank has either confirmed in writing that it accepts the terms or if such confirmation is not received, the firm has advised the client that the clients’ money held in that account may not be protected as effectively as it would if held in a bank in the United Kingdom. The client must also agree in writing to the bank or institution to be used.

Where the bank is within the European Union:

• the bank must acknowledge the status of the money in accordance with the regulations; or
• the client must be advised that the money may not be as effectively protected as it would be had the bank been in the UK or Ireland.

Where the bank is outside the European Union, the client must accept in writing that they are outside the protection afforded by the regulations.

Withdrawals from a client bank account can only be made where a specific authority in respect of the withdrawal has been signed by a principal of your firm or by an individual to whom specific authority in writing has been delegated by the principals of the firm.

Reconciliation of client money bank accounts must be undertaken at least once every five weeks and any differences uncovered must be rectified immediately, unless the difference arises as a result of timing.

The principals of a firm must:

• Confirm their firm meets the regulations and supply evidence as required by the regulations or by Council.
• Ensure that the firm undertakes an annual review of procedures designed to ensure compliance and prepares any return required to confirm compliance.

The records of such reconciliations and reviews must be held for at least six years and must be available on request for inspection by ICAEW.

The Council may, on providing notice, appoint someone to inspect the books and records of your firm or require you to provide an Independent Accountant’s report.

Any money held on a client account that cannot be attributed to a specific client, or where a client cannot be traced for at least five years can either be paid to a registered charity or be retained indefinitely on deposit for the benefit of the untraced or unidentified clients (Regulation 32). The firm will remain liable to repay any monies paid to a registered charity.

If the amount to be paid to charity is more than £10,000 the registered charity must provide an indemnity against any claim subsequently made by the client for the money.

Where a client has ceased to exist (eg, a limited company that has been struck off), you should contact the treasury solicitor (bonavacantia.gov.uk) for advice.

Where a firm ceases to practise, unclaimed clients’ money may be paid to a registered charity regardless of how long the client has remained untraced provided that the registered charity provides an indemnity and ICAEW is notified in writing of the amounts paid to a registered charity (Regulation 33).

Cheques or banker’s drafts that are not ‘client money’ should be forwarded to the payee or dealt with in accordance with the client’s written instructions.

Regulation 31 of the Clients’ Money Regulations requires any firm which is wholly owned and/or wholly controlled by a single member (the sole principal) to have appropriate arrangements in place to allow the distribution or processing of clients’ money in the event of the incapacity or death of that member. This requirement only applies if the firm holds clients’ money.

The requirements of Regulation 31 apply to sole practitioners, limited companies with a single director and no company secretary. It also applies to more complex structures, for example an LLP with two members one member who is an individual and the other member is a company, and the individual is the sole director of that company, so effectively the LLP is wholly owned/controlled by a single member.

While this may be achieved in a number of ways, ICAEW feels the most appropriate method is the use of the alternate arrangements set out in Regulations and Guidance – Arrangements to cover the incapacity or death of a sole practitioner. The arrangements recommended by ICAEW for appointment of an alternate involve:

• appointment of the alternate as an attorney under a legally binding Power of Attorney to enable them to act during the sole principal’s lifetime; and
• appointment of the alternate as an executor under the sole principal’s will – necessary because any power of attorney, including a lasting power, is revoked on death; and
• completion of an agreement appointing the alternate to act in accordance with the guidance. This agreement also enables the parties to agree any other arrangements that they wish to make between themselves.

Sole principals should also be aware that even the proposed arrangements set out above are not necessarily immediately effective in the event of death and banks will frequently refuse to allow an executor to operate a bank account until probate is granted.

Nevertheless, Regulation 31 can be satisfied more simply through the introduction of another suitable person, not necessarily with a professional qualification, to act as an alternative signatory in respect of client bank accounts alone. The operation of banking law, however, may result in a bank refusing to continue with existing signing arrangements on notification of the death of the sole principal.

Sole principals should bear this in mind when informing clients of the arrangements that they have made.

Finally, those sole principals who hold clients’ money must notify ICAEW of the alternate’s identity within three months of first holding clients’ money. To help you there is a standard form for notification available on the ICAEW website.

Traditionally, the most common reason for complaints to ICAEW about clients’ money concerns the situation where a client has received a tax rebate from which his accountant has deducted fees. The client claims that this was the first occasion they knew of the charges and considers them to be excessive. Many practitioners do not fully understand the regulations in this area.

The following issues are sources of commonly occurring problems. If you believe one of these issues may arise in your practice then you should take action to establish a procedure to deal with it.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.