Interest rates are currently 4.5% and set to increase again- are you getting the most from your client account deposits? 

Some law firm owners and partners may wonder if this is a legitimate source of income and whether looking around for better client rates could be non-compliant. Interest earned on client money belongs to the firm and is a legitimate source of additional income as well as improving cashflow. For example, you deposit £6m at a rate of 4.5%, that is additional revenue (and cash) to the firm of £270,000 per year, or £22,500 per month depending on the terms of the account.

The Law Society’s guidance is that firms may earn profits from client interest, providing they are complying with the underlying requirements of the Solicitors Accounts Rules. Rule 7.1 of the Rules states that firms need to account to clients or third parties for a fair sum of interest on any client money held by you on their behalf unless you have entered into a written agreement with the client or third party to come to a different arrangement (Rule 7.2).  

So, what is classed as a fair sum? The Accounts Rules do not prescribe how a firm should calculate the amount of interest, only that it should be a ‘fair sum.’ This contrasts with the position before Outcomes Focused Regulation (OFR) was adopted, where previous rules provided a prescriptive formula on the interest required to be paid. The 2019 Rules allow firms the flexibility to set their own interest policies to achieve a fair outcome for both the client and the firm. Therefore, how a firm achieves compliance with Rule 7 is now largely a matter of choice for an individual or firm. 

When looking at the market for banks offering better rates, be aware that many of these higher rates will come with specific terms and conditions, for example, fixing deposits for a certain period of time before that rate is achieved. When considering these types of offerings, firms must bear in mind other requirements of the Accounts Rules regarding where client accounts are maintained, that client money is available on demand unless otherwise agreed with the client or third party, sufficient client accounting systems and controls are in place and maintained, and that, ultimately, the underlying principle of protecting client money is adhered to.

The full Interest Rates update is published in Legal Futures and can be read HERE. 

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