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Clients' money regulations

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Published: 01 Oct 2013 Updated: 03 Feb 2022 Update History

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Contents

Technical helpsheet outlining the regulations governing the handling, banking and return of money held on behalf of clients.

Introduction

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:

(a) a body corporate or partnership including a limited liability partnership which is wholly or partly composed of members of ICAEW engaged in public practice;
(b) a member who is engaged in public practice as a sole practitioner; or
(c) 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:

What is clients’ money?

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.

What is not clients’ money?

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:
    (i) the client has given specific written authority that has been acknowledged by the bank before it exercises authority; and
    (ii) 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.

Confirming client identity – ‘know your client’

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.

Setting up client bank accounts

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.

Operating client bank accounts

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 (www.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.

Special requirements for sole principals

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.

Avoiding the pitfalls – a guide to the most frequently occurring problems

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.

Problem

Discussion

1. Overpaid fees.

Clients can overpay ledger balances or pay a fee account twice. It is not appropriate for a firm to maintain a credit balance on a fee ledger account without the client’s knowledge and consent. In most practices it is unlikely that the error will be spotted before the cheque has been banked. Firms should have procedures to ensure that the amount is identified within a reasonable time. Ideally the amount should be returned to the client directly on discovery. However, if this is not possible it should be transferred to the client bank account and the client informed.

2. Trust money.

Where a principal or employee is a trustee in a trust, the trustee normally opens a bank account in the name of the trustees and all trust money is banked therein. In such circumstances it would not normally be appropriate for money in respect of such a trust to be paid into any firm’s (client or otherwise) bank account.

3. Monies held over a long period.

Occasionally money can be held in the client bank account for longer than was expected when the money was received. The requirement to hold the money on an interest-bearing account and to pay material interest (eg, on £1,000 if held for more than 8 weeks) means that firms need to identify this money as soon as possible. Once such an issue has been identified, action needs to be taken either by transferring the amount or returning it. The interest due needs to be calculated and accounted for to the client.

Money should not be held on a client account for longer than necessary and if there is no longer a reason to retain the funds they should be returned promptly to the client (Regulation 20A).

4. Cleared funds.

Funds cannot be withdrawn from the client bank account until cleared. The practice of writing, sending out or banking cheques on the client bank account out of funds banked on that day is not allowed because it is effectively other peoples’ money being used.

5. Withdrawing fees within 30 days.

The withdrawing of fees from money held on client account is the commonest reason for complaints against practitioners relating to clients’ money. Fees can only be withdrawn if:

  • the client has agreed the precise amount of the fee; or
  • the fee is calculated in accordance with an agreed written formula;or
  • 30 days has elapsed from the issue of a fee statement that has not been questioned.

The usual reason for contravention of this requirement is the practice of drawing up a bill and writing two cheques (one to the client and one to the firm) immediately on receipt of a tax rebate. Firms are reminded that they must comply with one of the three options set out above.

Note: cheques not drawn in favour of the firm must not be paid into the client bank account but should be passed directly to the client notwithstanding the presence of unpaid fees.

6. Money not relating to clients.

Amounts should only be banked in the client bank account when they relate to clients. Firms sometimes deal with monies that, although belonging to individuals or entities, do not specifically belong to clients. In such cases the client bank account should not be used. For example, staff charity donations or rent received in respect of property owned by a principal. The safeguarding and propriety of dealing with money that does not belong to the practice is important. In all circumstances an appropriate bank account should be used even if this has to be opened specifically for the purpose.

7. Receiving or making payments that do not relate to accountancy services the firm is performing.

Regulation 8A is specifically to prevent a firm’s client bank account being used as a banking facility for clients. Deposits into and out of the account should have a connection to an accountancy service being performed by the firm. Accountancy service is defined in the ICAEW Statement on Engaging in Public Practice and includes taxation services. Specific guidance is available on the website in relation to Regulation 8A.

8. Mixed monies – receipt of a sum that is partly clients’ money and partly office money.

This commonly relates to commission received where one amount relates to several clients and/or the clients’ consent to retain all of it has not been received. The money should be paid into the client bank account and the amount, which is not clients’ money, transferred out as soon as the cheque or draft has cleared.

9. Accounting for interest.

  • Where interest is earned on a client bank account, this must be accounted for to the client. The regulations do not include a de-minimis limit, but a client bank account need only be interest bearing if ‘material interest’ is likely to accrue. Regulation 16 does allow a client to agree in writing to an alternative treatment, for example, accounting for interest only over a certain amount. Accounting for interest can result in substantial administrative requirements where very small sums of interest have been earned because of the timing of posting and clearance of cheques.

The following suggestions may assist:

  • Use a non-interest-bearing account where interest earned would not be material.
  • Have a strict procedure to identify items, which might result in ‘material interest’.

10. Responsibility, control and supervision.

Experience has shown that when improprieties have arisen in respect of clients’ money, control over that money has almost invariably been exclusively by one individual without adequate safeguards, supervision or review by others.

11. Absence or sickness.

When the person who controls the client bank account is absent for a period of time, control should be taken over by a principal (including obtaining chequebooks and records). Leaving control of the client bank account to inexperienced administration or secretarial staff can result in errors and mistakes.

12. Alternates of sole principals.

The regulations require any firm which is wholly owned and/or wholly controlled by a single member (the sole principal) to appoint an alternate in respect to incapacity or death. The alternate must be able to legally operate the client bank account. The alternate does not have to be a member but the practitioner needs to be convinced of the integrity of the proposed alternate. The alternate for the client bank account does not have to be the same person as the alternate for the practice work. Consideration could be given to using a spouse, relative or employee.

13. Legal operation of the bank account.

Due to the interaction of banking law and the law governing the dealing with deceased estates the following needs consideration:

  • The alternate may need to have existing signing rights on the clients’ money bank account.
  • There may need to be special agreements with the bank.
  • The alternate will probably need a legally binding power of attorney over the sole principal.

The alternate may need to be a special executor of the practitioner’s will.

14. Previous clients who cannot now be traced.

Firms may hold clients’ money that belongs to previous clients of the firm and whose existing whereabouts is unknown. If you have not been able to trace the client for five or more years any money held on a client account can either be paid to a registered charity or be retained indefinitely on deposit for the benefit of the untraced or unidentified client.

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. ICAEW Foundation www.icaew.com/foundation (a registered charity number 313983) has indicated that it will normally accept such funds on an indemnity basis.

It may be appropriate before accepting funds from clients to make a written arrangement either in the engagement letter or otherwise setting out how such unclaimed money would be dealt with. In any event, client money must be returned to the client promptly as soon as there is no longer any reason to retain those funds (Regulation 20A).

Where the client has ceased to exist eg, a dissolved company, you can refer the matter to the treasury solicitor (www.bonavacantia.gov.uk).

15. Client’s identity.

Regulation 8 requires that before holding any clients’ money on behalf of a client, a firm must first verify the identity of the client.

If in doubt seek advice

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.

Changelog Anchor
  • Update History
    01 Oct 2013 (12: 00 AM BST)
    First published
    03 Feb 2022 (12: 00 AM GMT)
    Changelog created, helpsheet converted to new template
    03 Feb 2022 (01: 00 PM GMT)
    Minor updates.
    17 May 2022 (05: 00 PM BST)
    Removed link to Clients’ money regulation compliance review helpsheet, which has been archived and is no longer available on the website. No change to technical content.
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