Lingering Residual Balances: A Persistent Compliance Risk for 2026

What’s Happening?

Residual client balances continue to reign as one of the most persistent compliance risks that law firms face in 2026. Despite years of guidance, repeated SRA communications and numerous regulatory warnings, many firms still struggle to clear the entire balance remaining on their ledger long after a matter concludes.

Recent enforcement activity brings to light the severity of this problem. In one high-profile case that concluded in 2025, a London law firm and its director were both fined £25,000 each. This was after investigators had found an excess of £287,800 across 1,786 matters, some being untouched for over a year. Christofi Wells & Co, an East London firm, was publicly rebuked for holding nye on £289,000 across 369 finalised matters, some dating back over a decade.

Audit data provides further evidence to support this. Residual balances remain the number one breach identified within SRA Accounts Rules audits, even surpassing improper ledger use and late reconciliations. Hazlewoods’ recent audit summary found that residual balances appear in approximately two-thirds of the reviewed firms. This shows us that this is not an isolated error but a systemic, sector-wide challenge.

Why It Matters

Residual balances should be taken into consideration as they expose firms to significant regulatory, financial and reputational risk. According to the SRA Accounts Rule 2.5, firms are required to return client money “promptly… as soon as there is no longer any proper reason to hold those funds.” Despite this information being clearly presented, many firms still leave balances unresolved for long periods of time, occasionally years.

The consequences include:

• Major fines, rebukes and regulatory investigations
• Qualified accountant’s reports, often linked to repeated failures
• Harm to company reputation, especially in cases where clients learn money was held without reason
• Costly remedial exercises involving staff time, tracing clients, ledger corrections, audits and system reviews

Failures also signal deeper operational issues, such as poor oversight, communication between fee-earners and finance, and improper processes. All of which concern regulators who assess a firm’s overall compliance culture.

How It Works

The primary causes for residual balance failures are, more often than not, down to structure.

A main cause is due to a lack of file-closing procedures. Files that are left open or closed informally, unspent funds or small overpayments can remain on ledgers indefinitely until cleared. Many firms also tend to misunderstand when a balance becomes “residual”, especially where unincurred disbursements or small outstanding payments are involved.

Fee-earners may simply assume that their financial department will handle any balance clearance, meanwhile finance teams may not have the authority to chase fee-earners or clients. This common oversight often leads to a residual balances accumulation until financial audits expose them.

Audits often identify any inappropriate usage of suspense, miscellaneous or charity-ledgers, where donations are infrequent or have been fabricated altogether. Suspense ledgers often contain historic balances that ideally should have been resolved years prior.

A further issue is the failure to trace clients. Clients may have relocated, changed contact details or simply not reciprocated any attempts to get in contact. Many firms are lacking in systematic, documented processes for being able to portray any reasonable attempts to return funds, especially when funds aren’t very significant. Regulators now require you to provide a clear, auditable record of all tracing efforts.

Hazlewoods’ audit insights make it clear that firms fare far better when responsibility for the clearance of balances sit within a dedicated finance or compliance team, rather than fee-earners who tend to deprioritise the administrative side of the task.

Guidance from The Law Society late last year reinforced the need to take action. The new Practice Note recommends making tracking and recording of residual balances a regular occurrence, at the very least, annual communication with clients. Every 6 months, you should be aiming to review all balances and more rigorous tracing methods such as contacting employers, checking electoral roll or probate registers and using third-party data where appropriate.

Whilst the SRA has not directly imposed fixed deadlines for returning residual balances, the tone of regulatory discussions suggests that a shift toward more prescriptive expectations will be implemented in the future.

Who does this affect?

Residual balances affect all SRA-regulated law firms, but particularly:

• COFAs, practice managers, finance leads and legal cashiers responsible for compliance and ledger integrity
• Fee-earners and support staff in high-volume areas such as conveyancing, probate, commercial property and litigation
• Senior management, those who are accountable for regulatory breaches and the wider compliance culture

When It Applies

The obligation to return client money “promptly” has always been applied under the SRA Accounts Rules. However, the updated guidance issued by The Law Society at the end of 2025 signals a heightened expectation for compliance in early 2026 and beyond.

Regulators now expect firms to:

• Keep track and record residual balances consistently
• Communicate annually with clients holding unreturned funds
• Conduct internal reviews of all residual balances every 6 months
• Document all tracing efforts, especially when balances are older or clients are difficult to contact

Given that there has been an increase in scrutiny seen throughout 2025, early 2026 is a critical point for firms to clear their balances and strengthen internal procedures before audit cycles become harder to manage later down the line.

How DSK Can Help

DSK is able to provide strategic support in order to help firms bring their residual balances under control and remain compliant throughout 2026. Our experts can review your current balances, identify any systemic flaws and formulate improved processes for file closure, ledger reconciliation and exception reporting.

As compliance scrutiny amplifies, starting preparation early can put your firm in a stronger and safer position. Address any residual balances now, not when audits or investigations bring them to light. Get in touch today to see how we can specifically help you.