Solicitors Qualifying Examination (SQE) Ethics, Professional Conduct and Solicitors Accounts (Pervasive) Flashcards

24 sample cards from the Ethics, Professional Conduct and Solicitors Accounts (Pervasive) deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What are the conditions for the 'incidental' financial services exemption to apply to a law firm?

   The activity must: arise out of, or be complementary to, the provision of a particular professional (legal) service to the client; not be of a kind prohibited by the Non-Investment Insurance/Scope rules; not be specifically excluded; the firm must account to the client for any commission; and the manner of provision must be incidental to the legal services. The firm must be supervised under the SRA Financial Services (Scope) and (Conduct of Business) Rules.

2. What are the rules on referral fees and referral arrangements under the SRA Code?

   You may pay or receive referral fees provided you ensure the arrangement is in writing, the client is informed of it and of any fee/financial arrangement, and the introduction is in the client's best interests. However, referral fees are PROHIBITED in personal injury and clinical negligence claims under s.56 LASPO 2012. You must not allow referral arrangements to compromise your independence or duty to act in the client's best interests.

3. What must you tell a client about commissions received from third parties?

   You must properly account to clients for any financial benefit (such as commission) you receive as a result of their instructions, except where they have agreed otherwise. The commission must be disclosed and, in financial-services contexts under the exemption, accounted for to the client.

4. What is a solicitor's 'undertaking' and why is it significant?

   An undertaking is a statement, given orally or in writing, whether or not using the word 'undertake', to someone who reasonably relies on it, that you or a third party will do something or cause it to be done, or refrain from doing something. It is personally and professionally binding, enforceable by the court against the solicitor, and a breach is professional misconduct — so undertakings must be performed within an agreed timescale or, if none, within a reasonable time.

5. What does the SRA Principle on equality, diversity and inclusion require of firms?

   You must not unlawfully discriminate, victimise or harass anyone, and must act in a way that encourages equality, diversity and inclusion. Firms must comply with the Equality Act 2010 in respect of staff, clients and third parties, make reasonable adjustments for disabled persons, and ensure their managers and employees do likewise.

6. State the fundamental rule of the SRA Accounts Rules regarding client money and the firm's own money.

   You must keep client money separate from the firm's (business) money. Client money must be held in a client account, must be available on demand, must not be used to pay the firm's own debts, and the firm must never use one client's money for another client's benefit. The fundamental obligation is to keep client money safe (Rule 1).

7. What is the SRA definition of 'client money'?

   Client money is money held or received by a firm: (a) relating to regulated services delivered to a client; (b) on behalf of a third party in connection with regulated services (e.g. stakeholder money, disbursements); (c) as a trustee or holder of a specified office or appointment; or (d) in respect of fees and unpaid disbursements before delivery of a bill, if the firm holds other client money for that client.

8. Under the SRA Accounts Rules, what must happen to client money 'promptly', and what does the firm do with money received in mixed funds?

   Client money must be paid promptly into a client account (Rule 2). Where money received is partly client money and partly the firm's money (mixed receipt), the whole sum must be paid into a client account and the firm's portion transferred out promptly once it is identified, or alternatively allocated per the firm's procedures, provided client money is safeguarded.

9. What is the third-party managed account (TPMA) exemption to holding client money, and what is the alternative for low-value money under Rule 2.2?

   A firm may operate via a TPMA so it does not itself hold client money, provided the client agrees and is informed of terms and any fees. Additionally, under the de minimis / Rule 2.2 provision, a firm need not pay certain money into the client account where, for example, it is only ever holding fees/unpaid disbursements after a bill, or money is held under a written agreement with the client to that effect.

10. When may a firm withdraw money from the client account to pay its own fees?

    You may withdraw client money to pay the firm's costs only after you have delivered a bill of costs or other written notification of costs to the client; the money then becomes properly due to the firm and ceases to be client money. Withdrawal must be only for the specific purpose, must not exceed the money held for that client, and only the amount of the bill may be transferred.

11. What records must a firm keep under the SRA Accounts Rules to record and reconcile transactions?

    You must keep accurate, contemporaneous and chronological records: a record of all receipts and payments of client money (cash book) and a separate client ledger for each client showing all dealings with that client's money, distinguishing client money from business money, and a running balance. Records must be kept for at least 6 years.

12. What is a client account reconciliation, how often must it be done, and who signs it off?

    At least every five weeks you must obtain statements/passbooks for all client accounts and reconcile the cash book balance with the bank statement balance and with the total of all client ledger balances. Any differences must be promptly investigated and corrected. The reconciliation must be signed off by the COFA or a manager of the firm and kept as a record.

13. What is the 'two-balance' / three-way reconciliation principle for client money?

    On reconciliation, three figures must agree: (1) the cash book balance for client money; (2) the bank/building society statement balance (adjusted for unpresented items); and (3) the total of all individual client ledger balances. If they do not agree, the discrepancy must be identified and corrected promptly. The total client ledger balances should never exceed the cash held.

14. What is the rule about a client ledger account showing a debit (overdrawn) balance?

    A client ledger account must never show a debit balance for client money, because that would mean you have spent more of a client's money than you hold for them — effectively using one client's money for another, which is prohibited. Such a shortfall must be replaced promptly from the firm's own money.

15. How must interest on client money be dealt with under the SRA Accounts Rules?

    You must account to clients for a fair sum of interest on client money held, unless a different arrangement is agreed in writing with the client. The firm sets a written interest policy that seeks to provide a fair outcome; de minimis amounts may be excluded. Interest is generally paid from the firm's own funds (business account) rather than necessarily a designated deposit account.

16. What is the difference between an 'agency' (disbursement paid) and money received for unpaid disbursements regarding professional vs other disbursements?

    Money received for disbursements the firm has already incurred and paid is the firm's money (reimbursement) and can be paid to the business account once billed. Money received in advance for disbursements not yet incurred is client money and goes to the client account. Distinction matters for whether it is treated as client or business money.

17. Give the bookkeeping double entry for receiving £1,000 from a client to be held on account of costs.

    This is client money. Entries: CREDIT the client ledger (client side) £1,000 and DEBIT the client cash account £1,000. Both entries are on the client side of the books, reflecting an increase in client money held for that client. $$\text{Client cash (DR) } \pounds 1{,}000 \quad\Rightarrow\quad \text{Client ledger (CR) } \pounds 1{,}000$$

18. Show the double entry for transferring £600 from client account to business account to pay the firm's bill after delivering it.

    Step 1 (client side): DEBIT client ledger £600 and CREDIT client cash £600 (money leaves client account). Step 2 (business side): DEBIT business cash £600 and CREDIT client ledger (business side)/costs £600 (money enters business account). The transfer can only be made up to the amount of the bill and the money held for that client.

19. In a conveyancing scenario, how is the deposit on exchange treated when the firm holds it as stakeholder versus as agent for the seller?

    As stakeholder, the deposit is held to the order of BOTH parties and cannot be released to the seller until completion — it is client money held in the client account on a stakeholder ledger. As agent for the seller, the deposit belongs to the seller on exchange and can be passed to the seller/used towards a related purchase. The capacity changes who is entitled to the money before completion.

20. What is the SRA Accounts Rules treatment of money held that is NOT client money but is the firm's own — e.g. money received for a bill already delivered with no other client money held?

    If the only money received relates to fees and disbursements already billed (and you hold no other client money for that client), it is treated as the firm's business money and is paid into the business account — it falls outside the definition of client money under Rule 2.1/the de minimis approach. Care must be taken that the conditions are genuinely met.

21. What must a firm obtain annually in relation to its client accounts, and when is delivery to the SRA required?

    Firms that have held client money must obtain an Accountant's Report within 6 months of the end of the accounting period. The report need only be delivered to the SRA if it is qualified (i.e. shows a failure to comply that puts client money at risk). Firms holding only small amounts (e.g. average/maximum balances below the de minimis thresholds, £10,000 average / £250,000 maximum) may be exempt from obtaining a report.

22. What is the rule on improperly using a client account as a 'banking facility'?

    You must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawals from, a client account must relate to the delivery by the firm of regulated services. Allowing money to pass through the client account with no underlying legal transaction is a serious breach (and a money-laundering red flag).

23. Compare the duty to the court with the duty to the client when they conflict.

    Your duty to the court and the proper administration of justice (Principle 1) overrides your duty to act in the client's best interests (Principle 7). You must never mislead the court (or allow it to be misled), must not construct facts or fabricate evidence, and must comply with court orders — even where doing so is contrary to your client's wishes. You may withdraw if a client insists on misleading the court.

24. Distinguish 'material' information for disclosure from confidential information, using the conveyancing mortgage fraud context.

    Material information is anything you know that is relevant to your client's matter and which they would want to know to make decisions — e.g. acting for buyer and lender, a back-to-back sale, a price discrepancy, or a direct payment between parties may be material to the lender. But you cannot disclose information confidential to another client without consent; if you cannot disclose material information without breaching confidentiality, you generally must cease to act for the party to whom disclosure is owed.

What this deck covers

Ethics, Professional Conduct and Solicitors Accounts (Pervasive) flashcards FAQ