As a regulatory and disciplinary solicitor working exclusively with solicitors and law firms, my engagement is rarely with practices that are fully compliant. Instead, I encounter firms and individuals under investigation by the SRA or facing internal sanctions or referral to the Solicitors Disciplinary Tribunal (SDT).
Among the spectrum of potential breaches of our professional code and the SRA Accounts Rules, any breach -absent dishonesty or lack of integrity -is considered serious. Introduce recklessness, and the breach escalates. Add dishonesty or a breach of integrity, and the COLP, COFA, or managing partner may find themselves in strike-off territory, with the firm facing the real prospect of SRA intervention.
What Are Residual Balances?
Residual balances, also known as closing balances, are funds left in a client account after the conclusion of a matter. Under Rule 2.5 of the SRA Accounts Rules and Paragraph 4.2 of the SRA Code of Conduct, solicitors are duty-bound to:
- Safeguard client money.
- Return it promptly when there is no legitimate reason to retain it.
There is no de minimis threshold. Client money is client money.
Why Do Firms Hold Residual Balances?
Legitimate reasons include:
- Retentions or undertakings.
- Pending IHT payments without clearance.
- Unposted disbursements or bills.
However, balances may also persist due to:
- Lack of client instructions.
- Unprocessed cheques.
- Deceased clients with no known executors.
- Poor file management or inherited balances from other practices.
The Compliance Risk
Residual balances are not inherently problematic. The issue arises when firms fail to deal with them promptly and properly. The SRA views this as a strict liability breach, and enforcement is real as these recent fines demonstrate:
- Enfield based Curwens LLP: £105k in residual balances over 13 years → £14,116 fine.
- Bradford firm Simpson Duxbury: £600k in residual balances, some 25 years old → £5,889 fine.
Beyond fines, firms holding residual balances risk, reputational damage, adverse publicity, SDT referral, Control orders, suspension, or strike-off. If you discover a residual balance, look at the file, quiz the fee earlier and if it cannot be returned to the client or a third party, your options are determined by the size of the balance:
Balances Under £500 – You may pay these to charity without SRA approval, but only after taking reasonable steps to locate the client:
- Review the file.
- Contact all known addresses, emails, and phone numbers.
- Use online searches, electoral roll, Companies House, DWP services.
You must:
- Keep a central register.
- Retain records for at least six years.
- Obtain a written indemnity from the charity.
Balances Over £500 – These require SRA authorisation via a formal application to the Ethics and Guidance department. You must:
- Provide evidence of exhaustive tracing efforts.
- Justify the proposed action.
- Choose a charity that offers a written indemnity.
Out-of-pocket expenses (e.g., Companies House searches) may be deducted, but your time and fees cannot.
Why Is This Still a Problem in 2025?
Modern firms with robust compliance frameworks should not struggle with residual balances. Yet many do, especially with historic balances. These are often deferred due to perceived low priority, lack of resources or fragmented investigations. Even when funds are sent to charity, accounting records are often incomplete, and SRA authorisation is poorly documented.
Residual balances are not just a technical accounting issue, they are a compliance risk with real regulatory consequences. If you don’t have a policy in place, if you don’t review the balances post file closure, and if you have historic balances then these are a time bomb waiting to explode. Firms must treat residual balances with the seriousness they deserve. The SRA is watching, and residual balances are an easy target for enforcement.
If you’re a COLP, COFA or managing partner, this is your responsibility. Act now. Review your balances, document your actions and protect your firm.
Andrew Blatt is widely recognised as a leading authority in professional discipline, consistently ranked by Chambers UK and Legal 500. With decades of experience and a reputation for strategic insight, he continues to support solicitors through complex regulatory challenges. Andrew Stephen Blatt – Murdochs Solicitors London