Client money

RICS professional assurance auditors routinely carry out regulatory review visits of firms handling clients’ money. The primary aims of the visits are twofold. Firstly, to ensure that client’ money is held in accordance with the Rules of Conduct and the Professional Statement on Client Money Handling. Secondly, to provide advice and assistance, identify gaps and help regulated firms back into compliance wherever possible. We classify findings from visits into Critical, Serious and Additional points

Some firms are not completing “three-way” client account reconciliations where client funds are held in a general bank account. Bank reconciliations may be completed by reconciling the cash book or system balance to the bank statement, but the reconciled cash book balance may not be reconciled to the total of the client ledger balances. In the absence of such a reconciliation, a firm may not have an accurate and complete accounting record or be able to identify discrepancies timeously.

Some firms do not retain evidence that reconciliations have been reviewed and signed off by a Principal or an independent senior staff member. The Principals of RICS regulated firms are responsible for ensuring that clients’ money is correctly accounted for. Principals (or an independent senior staff member) should be involved in the reconciliation process. It is important that there is a check on the timing and accuracy of reconciliations. We check that old reconciling items, unusual transactions etc. have been followed up and resolved. In a small firm, the review enables the Principal to have confidence that the records are up-to-date and in good order. Once reviewed, reconciliations should be signed and dated as evidence of approval.

The client account bank balance should not be overdrawn, nor should the cash book ever show a negative position. However, if the individual client ledger balances in a general client account are overdrawn, there is automatically an overall deficit potentially disguising a shortfall in client funds. If discovered, the firm should place funds into the client account pending resolution of the negative balance. Any funds paid into the client account by the firm automatically become client money and must not be withdrawn until the firm receives funds for that specific client. Firms must implement controls to ensure that client ledger balances do not become overdrawn.

Increasingly, electronic payments are being made by non-principals who also process client money transactions, sometimes without due supervision or oversight. This lack of senior approval and segregation of duties increases the risk of misappropriation of client funds. Approval to execute electronic payments should be restricted to firm principals or a senior manager who is remote from the day-to-day operation of the client account. Those who do not meet these criteria should only be able to authorise withdrawals from the client account with a second signatory.

In some cases, firms are relying on email confirmation of bank detail changes. Where this is the case, more robust verification procedures are required to ensure adequate safeguarding of client monies. As far as possible, this should include telephone checks. In the absence of adequate procedures in place to establish the validity of changes to payee bank details, there is an increased risk of inappropriate and / or fraudulent payments. 

Items requiring reconciliation should not be more than three months old with the exception of cheques which may be allowed six months to clear. Electronic receipts should normally be matched and recorded promptly, and firms should implement robust procedures to process receipts which are initially unidentified. Particular attention should be paid to bank statement entries which have not been recorded on the accounting system. The presence of old reconciling items could mean that client ledger balances are incorrectly stated. 

Where the word ‘client’ does not appear in the title of a bank account, there may be insufficient distinction between client money and office money. Consequently, in the event of firm insolvency, client money may not be ring-fenced by the bank. Where this issue is identified, the bank should be instructed to include the word ‘client’, in full, in the titles of all client money bank accounts as soon as possible. This will ensure that the bank and / or liquidators do not use this money to settle the firm’s liabilities. The account title should also include the name of the firm (or a reasonable abbreviation). Discrete accounts should also include the client name or property address.

It is acceptable to have a suspense ledger or a separate bank account to hold old or unidentified client funds. These accounts, however, are often overlooked as part of the reconciliation process. Firms should provide a breakdown of the balance held showing how long each amount has been held in the account. Records of investigations to trace the beneficiary should be retained. If, after three years, all avenues of locating the beneficiary have been exhausted then the funds must be donated to a registered charity. The firm must obtain a receipt and an indemnity from the charity.

Bank reconciliations should formally document the agreement of the bank statement balance, the cash book and, for the general client account, the client ledger also, explaining any differences. We would normally expect to see reconciliations undertaken on a monthly basis. Reconciliations should be carried out on a timely basis after the period end.