Five Tips for Preventing Residual Balances

What are Residual Balances?

Residual balances refer to client money remaining in a law firm's client account after a matter has concluded and all outstanding fees and disbursements have been settled. These balances can arise due to various reasons, such as:

• Unadjusted client advances: Clients may sometimes pay an advance deposit that exceeds the final bill.
• Unclaimed funds: Clients might be uncontactable or unresponsive to attempts to return their remaining balance.
• Refunds of Disbursements: Where a disbursement was refunded by the provider after the matter had concluded
• Mortgage Interest: Where interest on a mortgage has been miscalculated or the mortgage was repaid sooner than planned
• Disputed fees: If a client contests a fee, the disputed amount may remain in the client account until the dispute is resolved.
• Administration of an estate: Money remaining in client account that is payable to a beneficiary who cannot be traced
• Through Acquisition: If a firm buys another firm, details about who residual balances belong to may be lost in the process
• Interest Earned: Interest has been calculated on money held on behalf of the client and some interest is owed to the client the in line with the firm's interest policy

Accountants Reports

Section 3.9 of the SRA's guidance on planning for and completing an accountant's report highlights the importance of having adequate processes and controls for handling residual balances.

Reporting accountants are under a statutory duty to immediately report to the SRA if they have concerns about whether a solicitor or a law firm is fit and proper to hold client money.

They may request an exception report of residual client balances to check that the firm has complied with the requirement of Rule 2.5 to return client money promptly. If no exception report exists, they are likely to obtain a listing of client matters with balances where no work has been undertaken for a significant period of time and investigate from there. In Accountant’s Reports: When are Residual Balances a Red Flag? we cover this in more detail.

The Residual Balance Buildup

For many law firms, the process of clearing residual balances can lead to frustration. Commonly accounts teams produce monthly reports for each fee earner, detailing the cases they handled where the firm still holds a residual balance.

The fee earner is then asked to contact the client and arrange for the funds to be returned - perhaps needing to take the bank details for the client in the process. From the fee earners perspective, the case is already completed.

It is quite common for residual balance reports to be left for a ‘quiet afternoon’, because right now the fee earner is too busy working on live paying cases. The quiet day never comes, and unless action is taken to fix this cycle, residual balances can build up and become a potential compliance headache when it comes to rule 2.5.

Preventing Residual Balances

Law firms can implement several measures to minimise residual balances and ensure client money is safeguarded.

1. Obtain Client Bank Details Upfront

Collecting bank details securely at the outset of every matter, even when you don’t expect to be sending money to the client, helps manage residual balances effectively.

Products such as SafeAuth make it easy for firms to safely and securely capture the correct bank details for their clients, as well as check that the account has been active for at least 12 months - in line with current law society guidance.

If a residual balance shows up once a case is closed, with bank details on file the money can be returned easily. The alternative of trying to contact a client for a bank details later can be time consuming and expensive - especially if a fee earner needs to get involved to contact the client.

2. Regular Reconciliation

Frequent reconciliation of client accounts helps identify and address any discrepancies or unidentified funds.

3. Prompt invoicing and billing

Sending invoices promptly and following up on outstanding payments helps ensure timely settlements and minimises the chance of unadjusted client advances.

4. Automated Reporting

Set up your accounts system to, on a monthly basis, generate a spreadsheet showing any matter balances that haven’t changed for a period of time (e.g. 60 days), ideally with a sheet per fee earner and details of any notes previously added that identify what the balance is.

5. Accurate Disbursements

If disbursements are charged for but then not actually required, this can lead to surplus funds. Ensuring disbursements are quoted as accurately as possible helps prevent residual balances.

Managing Residual Balances

As the SRA guidance on planning for and completing an accountant's report notes, having processes and controls in place to manage residual balances effectively is a key component of complying with the Accounts Rules.

We help law firms manage and clear residual balances, as well as put processes in place to help prevent them in future. Contact us today to arrange a demo >>

Conclusion

Residual balances can pose a challenge for law firms. By understanding the risks involved and implementing proper safeguards, such as obtaining client bank details at the outset of a matter, regular account reconciliations and prompt invoicing, law firms can minimise residual balances and ensure client money is protected.