The violations that could hand you a £5,000 fine and disciplinary action

Receiving or holding client money? It’s vital that you read this to avoid sanctions.

AAT’s Clients’ Money policy (PDF) outlines the compliance rules placed on all licensed members who are receiving and holding client money. It is designed to protect client assets and money.

All firms are required to keep client money separate from the firm’s own money, and must open a specific clients’ money account.

All breaches are investigated in accordance with our Disciplinary Regulations and result in a reprimand and a monetary fine of up to £5,000.

The following key regulations are often the most common breaches around clients’ money identified during AAT’s practice assurance monitoring activity.

If you hold client money, or plan to do so, make sure you familiarise yourself with the policy and understand what’s required. 

Verify client identity

Before receiving or holding any money on behalf of a client, you must first ensure you’ve verified their identity. Requirements have become stricter over time, so make sure you verify pre-existing clients’ identities to the same standard as you do for new clients, as under the current money laundering regulations.

Open a client bank account

All firms are required to keep client money separate from the firm’s own money in segregated accounts with trust status. Failing to do so puts your clients at risk should your firm become insolvent while holding the money. 

Lawful and legitimate purpose

A firm’s client bank account must only be used for a lawful and legitimate purpose and bona fide transactions. Payments into and out of the firm’s client bank account must only relate to accountancy services that are (or have been or will be) provided by the firm.

Obtain a trust status letter

You have a responsibility to safeguard client money adequately. This means a firm must have a trust letter from the bank holding its client money to ensure, in the event of a firm’s insolvency, the client money is clearly identifiable and separate from the firm’s own assets. This will allow funds to be returned to the client quickly.

We have produced a draft letter template (DOC) that meets AAT’s criteria to assist you with obtaining this from the bank.

Immediately pay monies into client bank accounts

All clients’ money or mixed monies received by you or another principal at your firm must be paid immediately into a client bank account or directly to the client without any delay.

Clients’ money must be held in the currency in which it was received unless the client instructs otherwise in writing.

Follow regulations regarding designated accounts 

Where your firm holds or expects to hold a client’s money for more than 30 days and/or a sum in excess of £10,000, the money must be paid into a client bank account designated by the name of the client or by a number or letters allocated to that account.

Check permissions on withdrawals from a client bank account

There are several restrictions on when you are permitted or not permitted to withdraw money from a client account. Please refer to paragraph 24 to 29 of the Clients’ Money policy for full details. 

Please note any withdrawals must be authorised by a principal of the firm, or by an employee of the firm who holds written authority delegated by the principal. The written delegation should specify any restrictions on its use.

Manage interest correctly

You should always place your clients’ money in an interest-bearing account unless the interest earned would not be material. Make sure that a fair rate of interest on the money is earned, and ensure that all interest earned is paid or credited to the client, or as the client instructs in writing.

Maintain accurate records

A firm must keep clients’ money records, showing all the following: 

• details of all money paid into and out of all client bank accounts
• entries of all clients’ money paid direct to the client, or, on the client’s instructions, paid to a third party, identifying that person
• entries of all cheques received and endorsed over by the firm to the client or, on the client’s instruction, endorsed over to a third party, identifying that person
• entries of all electronic money transfers received or made and transferred direct to the client or, on the client’s instructions, transferred to a third party, identifying that person
• details of all transactions on each client’s ledger account, which will readily identify the balance held for each client and which will reconcile to the total of clients’ money held in the client bank accounts
• details of all unclaimed monies withdrawn from the client bank. 

Undertake regular reconciliation

At least once every five weeks, a firm must reconcile the total balances on all client bank accounts with the total corresponding credit balances in respect of its clients, as recorded by it. Firms must ensure figures are correct and immediately correct any differences identified.

Conduct a client money annual review

All firms must ensure they conduct a review at least annually. This is an opportunity for you to consider whether your systems and procedures comply with the Clients’ Money policy. Where possible, the review should be conducted by a principal who is not involved in the handling of clients’ money. Below are some key areas to consider during the review. This list isn’t exhaustive. 

• Has a client bank account been set up in line with the conditions of AAT’s Clients’ Money policy?
• Can you justify the need to hold the client’s monies?  
• Do you have a trust status letter from the bank in your records?
• Do you have designated account(s) if holding money for 30 days or more than £10,000?
• Do you have client instructions for payment, fee offset if applicable?
• Do you hold up-to-date client due diligence/identification of client details?
• Are reconciliations performed at least every five weeks on all client bank accounts?
• Are you retaining all records for at least six years from the date on which they were made? 
• Do you have written operational procedures for dealing with clients’ money?
• What action(s) were identified and actioned from the previous annual review?
• What’s the date of the next annual compliance review? 

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