In today’s SQE1 scenario, we explore a frequently misunderstood topic that can lead to serious regulatory breaches: what solicitors can and cannot do with client money. This question tests your ability to apply the SRA Accounts Rules correctly in real-world practice
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Today’s Question:
Liam, a solicitor, has received £30,000 from a client for litigation expenses, which he is required to hold in a designated client account. However, he decides to invest a portion of this money in a short-term savings account to earn interest, intending to add the earnings to the client account later. Liam believes this is a sound financial decision. What should Liam do regarding this situation to remain compliant with the Solicitors’ Accounts Rules?
- A) Liam should proceed with the investment, as long as he keeps a record of the transaction and intends to transfer the interest earned back to the client account.
- B) Liam should refrain from investing client funds altogether, as the Solicitors’ Accounts Rules require that client money be held securely in designated accounts without exposure to risk.
- C) Liam can invest the funds in a high-interest savings account and keep the client informed of the investment strategy, arguing that transparency allows for more flexibility.
- D) Liam should consult with a financial advisor to determine the best investment strategy for client funds, hoping to balance compliance with financial benefits.
- E) Liam should wait until the litigation is concluded and then invest any leftover funds, believing that this approach will ensure that client money is not at risk.
Correct Answer: B) Liam should refrain from investing client funds altogether
Liam is not permitted to invest client money under the Solicitors’ Accounts Rules, regardless of his intentions or the supposed benefits. Rule 3.3 of the SRA Accounts Rules is clear: client money must be kept safe and separate from office money, without exposure to risk. This means the solicitor must not place the money in any financial product that poses a risk to the capital, including investment or savings accounts with fluctuating interest or potential loss.
Even though Liam plans to return the interest to the client and believes it’s a smart financial move, the rules do not make exceptions based on intention. The core principle is risk avoidance and secure handling. His actions breach the fundamental duty of care and fiduciary responsibility to the client.
Key Points to Remember
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Client money must always be safeguarded — no exceptions.
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Investments, even “low risk,” are prohibited unless explicitly authorised in writing by the client and compliant with strict rules (usually in trust or probate contexts).
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Intention does not override regulation. Good faith doesn’t excuse rule breaches.
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Only regulated deposit-taking institutions (like banks) are acceptable for storing client money — and only in designated client accounts.
Breakdown of Incorrect Answers
A) “Liam should proceed with the investment…”
While keeping records and transferring interest may seem responsible, this option ignores the fundamental prohibition against investment of client money. Compliance is not about good bookkeeping — it’s about not taking risks with client funds in the first place.
C) “Liam can invest the funds and keep the client informed…”
Transparency is important but does not grant permission to breach the Accounts Rules. Informing the client does not equate to proper authorisation or compliance with regulatory obligations. This rationale may expose Liam to misconduct allegations.
D) “Liam should consult with a financial advisor…”
Even with expert advice, solicitors have a duty to comply with the SRA’s specific rules. Consulting an advisor does not change the illegality of investing client money. This approach misrepresents compliance as a matter of personal judgment rather than strict legal obligation.
E) “Liam should wait until litigation is concluded…”
Delaying investment doesn’t solve the problem. The money remains client money until it is properly billed or returned, and it must be safeguarded throughout that time. Investing after litigation still violates the core rule against exposing client funds to risk.
General Explanation
This scenario touches on a key element of solicitor conduct: the trust-based relationship between solicitors and their clients. The moment a solicitor holds client money, they assume a fiduciary duty to act only in the client’s best interest — and this means eliminating risk wherever possible. Investment, even with good intentions, exposes client funds to unpredictable outcomes. The SRA’s regulations exist to prevent misuse or misjudgment. Your role as a solicitor is not to maximise profit from client money but to ensure it is kept separate, secure, and untouched.
Q&A Corner
Q: But what if the client consents in writing?
A: In most standard client-solicitor arrangements, this still wouldn’t permit investment unless you’re managing a trust, estate, or are otherwise specifically authorised under a regulated financial arrangement.
Q: Can I at least place the money in a high-interest client account?
A: Yes — only if it is still a regulated, designated client account, and not an investment product. Interest earned in this manner must then be calculated and returned to the client appropriately.
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