Managing Client Money: The Essentials of Client Accounting Explained

When Axiom Ince collapsed in October 2023, approximately £64 million in client money had vanished. The Solicitors Regulation Authority intervened to shut down the firm, but the damage was done. Hundreds of clients discovered their money had disappeared, compensation fund payments eventually reached £37.2 million, and the entire solicitors’ profession faced increased levies to replenish the fund.

The Axiom Ince catastrophe represented a spectacular failure of client accounting, the critical but unglamorous function that governs how professional firms handle client money. This refers to funds that firms hold on behalf of clients, distinct from their own operating cash. And when this function fails, it can destroy careers, devastate clients, and shut down entire practices.

Solicitors hold house deposits and settlement payments. Accountants receive advance fees. Estate agents manage rental deposits. Financial advisers handle investment proceeds awaiting reinvestment. Across the UK, professional firms routinely hold billions on behalf of clients, creating an enormous web of fiduciary responsibility that most clients never consider until disaster strikes.

What Client Accounting Actually Means

Client accounting is fundamentally different from the normal accounting that businesses use to track their own finances. When a law firm invoices you £5,000 for legal work and you pay it, that becomes the firm’s money immediately. It goes into their business bank account, gets recorded as revenue, and they can use it to pay salaries, rent, or any other business expense.

But when that same law firm receives £50,000 from you to hold as a deposit for a property purchase, that money never becomes theirs. It remains your property throughout, even though it sits in an account controlled by the firm. They’re acting as a custodian, holding it temporarily until the house purchase completes and they transfer it to the seller’s solicitor.

Think of it like a safety deposit box facility at a bank. The bank controls access to the building and the vault, but each box belongs to a different customer. The bank needs precise records showing which box belongs to whom, and they can never treat the contents as their own property. Client accounting works on the same principle, except instead of physical boxes, firms maintain electronic ledgers showing each client’s balance.

Understanding what qualifies as client money determines whether the strict rules apply. The general principle is straightforward: if funds belong to the client rather than the firm, special treatment is required. But real situations create grey areas.

A house buyer sends £30,000 to their conveyancing solicitor to hold until completion. This clearly requires special handling. A personal injury claimant’s solicitor receives a £100,000 settlement payment before distributing it. Obviously the same applies. An accountant receives £5,000 to cover their fees and disbursements for preparing accounts. This gets complicated.

In the accountant example, if the £5,000 represents payment for work already completed, it’s the firm’s money and goes straight into the business account. But if it’s an advance payment for work not yet done, it should go into the client account until earned. If part covers future fees and part covers expenses the accountant will pay on the client’s behalf (like Companies House filing fees), the expenses portion definitely requires separate treatment.

Funds received in unclear circumstances create particular challenges. If a firm isn’t certain whether a payment represents client money or their own fees, regulatory guidance consistently says to treat it as client funds until the position clarifies. Interest earned on these balances creates another complication, as under most regulatory frameworks, that interest belongs to clients, not to firms.

How Client Accounting Works In Practice

The operational reality requires firms to maintain completely separate bank accounts: their business account for their own funds, and one or more client accounts for money belonging to clients. Within those client accounts, they need individual ledgers tracking exactly how much belongs to each specific client.

This creates a complex dual accounting system. When client money arrives, it doesn’t count as income or revenue for the firm. When it leaves, it doesn’t count as an expense. The firm is simply moving funds through accounts they control but don’t own. This neutral treatment continues until the firm actually earns fees, at which point they transfer specific amounts from the client account to their business account based on invoices raised.

Every transaction requires precise recording: which client it relates to, the amount, the purpose, the date. Get any element wrong and the individual client ledger becomes inaccurate.

Then comes reconciliation, the process that verifies everything balances correctly. Firms must perform a three-way reconciliation, typically monthly. First, they confirm their client account cash book (their internal record of all transactions) matches their bank statement. Second, they total up all the individual client ledgers. Third, they verify that this total matches the cash book and bank balance.

This sounds simple but involves painstaking detail. A firm with 200 active clients might have 200 separate ledgers to total. If the total is £500,000 but the bank account shows £500,500, there’s a £500 discrepancy somewhere. Finding it means checking every transaction, every ledger entry, every bank statement line until the error surfaces.

Modern practice management software like Clio, LEAP, and Xero Practice Manager offers integrated modules with automated reconciliations and compliance checks. These systems prevent basic errors like paying out more than a client’s ledger balance or forgetting to record transactions. They generate the reconciliation reports that regulations require and maintain audit trails showing every transaction.

But technology can only work with the data you give it. If someone records a receipt to the wrong client ledger, the system won’t catch that. If staff take shortcuts around proper procedures, the software becomes window dressing on a fundamentally broken process.

The Rules You Must Follow

Professional firms operate under some of the most prescriptive financial regulations outside of banking itself. For solicitors in England and Wales, the SRA Accounts Rules run to thousands of words of detailed requirements. Client money must be paid into a client account by the end of the next working day after receipt. You cannot use client accounts as banking facilities. You must obtain regular bank statements. You need an annual accountant’s report unless you haven’t held any such funds all year.

The accountant’s report deserves special mention. An independent accountant examines the firm’s records annually and reports to the SRA on compliance. This external verification catches problems firms might miss internally, but it only happens once a year. Between reports, firms must maintain standards themselves.

The Financial Conduct Authority’s CASS rules for investment firms go even further, requiring daily reconciliations rather than monthly ones. Firms must segregate funds in separate bank accounts and perform regular calculations to ensure they’re holding enough to meet all obligations.

Estate agents face their own regime. Since 1 April 2019, all UK estate agents holding client money must belong to a Client Money Protection scheme, providing insurance-backed protection if the agent misappropriates funds. Letting agents face fines of up to £30,000 for non-membership in a scheme, plus additional fines of up to £5,000 for failing to properly display their membership certificates.

Breaking these rules carries serious consequences. The SRA can intervene in a firm immediately if it suspects funds are at risk, effectively shutting the business down overnight. The FCA has imposed fines exceeding £1 million for CASS breaches. Individual practitioners can be struck off permanently, and in cases of deliberate misuse, prosecuted criminally with prison sentences of several years.

What Goes Wrong And Why

The SRA intervened into 25 law firms during 2021/22, rising sharply to 65 interventions in 2022/23. By 2024, that number had more than doubled compared to the previous year. These interventions weren’t all cases of deliberate fraud. Many involved accounting failures that spiralled: a missed reconciliation here, a procedural shortcut there, errors compounded by poor oversight.

Miss reconciliations for a few months and small errors become major problems. A £50 error in January becomes impossible to trace by June when you’ve processed thousands of additional transactions. By the time discrepancies surface, they can trigger immediate regulatory intervention and firm closure.

In October 2025, solicitor Shaun Callaghan was jailed for four years after stealing nearly £400,000 from clients over 17 years while working at two Essex firms. He pleaded guilty to 17 charges of fraud and two charges of theft. In one case, while handling a deceased woman’s estate, he altered the sums beneficiaries were supposed to receive and concealed more than £20,000.

Cases like this grab headlines, but they miss the more common story: well-meaning professionals who simply let standards slip until they faced ruin. The personal toll in these cases extends beyond professional consequences. Regulatory investigations are lengthy, stressful, and very public within professional communities. Even when individuals are exonerated of dishonesty, the reputational damage persists.

For clients caught up in failures, the impact can be devastating. Funds needed to complete a house purchase, locked away for months in an intervened firm. Compensation eventually paying out, but only after long delays and significant stress.

The financial consequences ripple across entire professions. In 2022/23, the SRA’s compensation fund paid out £41 million, the highest in seven years. Around £27 million of this related to the Metamorph Group intervention between December 2022 and January 2023. The fund, which typically pays out £13 million per year on average, came under severe pressure. By August 2024, Metamorph-related claims had reached £31 million.

Then came Axiom Ince. The fund initially held around £18 million. The scale of potential claims forced the SRA to increase profession-wide contributions significantly, passing costs onto thousands of law firms who had never come close to mishandling these funds.

Best Practices For Success

The firms that successfully handle these responsibilities share certain characteristics. They treat this function with the seriousness it deserves, as a core operational risk rather than a back-office afterthought.

They invest in proper systems and actually use them as designed, resisting the temptation to take shortcuts. They maintain clear written procedures covering every scenario: how to handle receipts, process payments, deal with unclear situations, perform reconciliations, escalate problems.

They enforce segregation of duties wherever possible. In larger firms, different people handle receipts, payments, and reconciliations. Even in smaller practices, having a bookkeeper who reports independently to senior management rather than being supervised by fee-earners provides crucial oversight.

They perform reconciliations religiously, typically monthly at minimum, and someone senior actually reviews them rather than filing them away. When discrepancies appear, they investigate immediately rather than assuming they’ll sort themselves out.

They also face up to an uncomfortable truth: this function requires dedicated resource. The successful firms either employ dedicated staff or outsource the function to specialists who do nothing else.

The Changing Landscape And Alternatives

Increasingly, firms are questioning whether they need to hold client money at all. Third-party managed accounts, where an independent company holds the funds and processes payments on instruction, remove much of the regulatory burden. For smaller firms especially, the cost of these services often proves cheaper than maintaining compliant in-house systems once you factor in staff time, software, insurance, and regulatory risk.

The professional landscape is shifting. As regulators impose ever-stricter requirements and the consequences of failure become more severe, holding these funds is increasingly seen as a specialist activity. Firms either invest properly in doing it right, with dedicated resources and robust systems, or they exit the activity entirely.

What’s certain is that muddling through is no longer viable. The combination of sophisticated regulatory supervision, detailed electronic audit trails, and severe sanctions for non-compliance means that failures get detected and punished more consistently than ever. For professional firms handling other people’s money, excellence in client accounting has become not just a regulatory obligation but a prerequisite for survival.