A question of interest

With the Bank of England continuing to hold the base rate of interest at 0.5 per cent, many of us have seen the interest we earn on savings plummet over recent years, and client funds held on a client account have been no exception. Many solicitors have therefore looked at alternatives offered by banks and building societies to try to get the largest return on what can be millions of pounds, but this needs to be approached with caution as some products on the market are not compliant with the SRA Accounts Rules.

‘Fair and reasonable’

The revision to the rules in 2011 saw the removal of the fiscal and temporal limits for reviewing balances held on behalf of clients, and the rule that as long as the interest calculated on the balance was in excess of £20, then interest would be payable to the client. Instead, this has been replaced by the statement in rule 22.1 that you must account to the client for interest when it is ‘fair and reasonable to do so in all the circumstances’.

The guidance notes for this rule add that in being‘fair’ the interest amount is unlikely to be as high as what could be achieved by the client depositing the funds themselves, and that the approach should be ‘outcome-focused’ in order to provide firms with a degree of flexibility. The guidance notes still use £20 as an example of the de minimis limit the solicitor may wish to apply; however, this can be set at whatever the practice believes is a reasonable level and should be reviewed periodically, with rule 23 providing further guidance notes on how this is best achieved.

So what options exist for solicitor practices?

1. Treasury deposit account

Rule 13 of the SRA Accounts Rules sets out the basic characteristics of a client account, with rule 13.8 stating that money held in a client account must be immediately available, even at the sacrifice of interest, unless the client otherwise instructs, or the circumstances clearly indicate otherwise. Banks have for a long time offered treasury deposit accounts to solicitors as a way of maximising the interest returns, as long as the practice is able to tie these funds up for a period of time (typically 28 days).

Therefore, these accounts are not instant access and breach rule 13.8 by failing to meet the requirements of a client account. These can only be used when a client has been made aware of the conditions and instructs for such an account to be used. If agreed, this would then fall under rule 15 – client money withheld from client account on client’s instructions.

In some circumstances, the treasury deposit account which is offered may permit instant access to the funds, but at the sacrifice of interest. Such terms would mean that the account does constitute a client account; however, solicitors should familiarise themselves with the exact conditions if the term is broken. If the terms do not state that any penalty will not exceed the amount of interest generated on the amount held, then it is imperative to establish that the penalty is to be collected from an office account and not the client account funds. The balance held for the client cannot be reduced for any penalties that may fall due as the payment is not ‘properly required’ under rule 20.1(a).

2. Designated client account

Another revision made to the rules in 2011 was with regards to designated deposit accounts set up for individual clients, where the account is in the name of the firm but with reference to the specific client. Previously, any interest earned on such accounts had to be accounted for to the client for whom the account was set up.

However, the Legal Services Act 2007 abolished the distinction between general client accounts and designated client accounts where interest is earned. Solicitors are therefore instructed to apply the same ‘fair and reasonable’ basis as with general client accounts.

Rule 22.3 states that practices must have an interest policy in place which “seeks to provide a fair outcome”. Ensuring the practice has a fair and detailed interest policy, communicated to clients at the outset, should not only result in clients being content, but also protect the firm. SJ

Daniel Edwards is senior manager of business services at Kreston Reeves