Interest and your 'client account

Following the shock
Brexit vote, there
has been no end of speculation about how the
UK's economy will cope throughout the transition period and into the years ahead.

Few will argue with the fact that unsettling times in the political world tend to run side by side with uncertainty in the economy. In the wake of the referendum, we have already seen the pound drop to a 31-
year low, and there is much anticipation as to whether the Bank of England base rate will drop below the static 0.5 per cent in the coming months.

While for now the rates remain at 0.5 per cent, many brokers and lenders are anticipating a cut in interest rates in August. Banks have already started to offer unheard of low interest rates
on loans, mortgages, and credit card products.

Client account

An educated guess would be that interest rates will continue at this low rate for some time, until the economy stabilises once the implications of Brexit have unfolded. This is obviously fantastic news for homeowners and those benefitting from low interest rates on their borrowing, but sadly, the same does not apply to solicitors holding
large sums of money in their client account.

Gone are the days when interest provided a lucrative income stream for solicitors' practices. It is therefore very common for firms to place
client money in a number of different client accounts in an attempt to increase the return on investment on these funds, and it is expected that this trend will continue as long as interest rates on general accounts remain low.

However, rule 23.1 of the Solicitors Regulation Authority (SRA) Accounts Rules 2011
does, of course, refer to the fact that an element of interest is accountable to the client, stating that 'interest paid must be a fair and reasonable sum calculated over the whole period for which the money is held'.

In such tough times,
solicitors often enquire of their accountants whether interest
is in fact still payable to their clients, and are interested in how to maximise the interest element retained in their office account. It is fundamental that an interest policy is maintained and regularly reviewed by solicitor practices to ensure client interest is being safeguarded effectively.

Interest policy

What should a firm's interest policy be? There is no definition of 'fair and reasonable', but the guidance notes to rule 23.1
give some good examples of
the factors a firm will need to consider when deciding upon
an interest policy.

The guidance note states:
'The sum paid by way of interest need not necessarily reflect
the highest rate of interest obtainable but it is unlikely to
be appropriate to look at only the lowest rate of interest obtainable. A firm's policy on the calculation of interest will need to take into account factors such as:

a) the amount held;b) the length of time the funds were held;

c) the need for instant access
to the funds;

d) the rate of interest payable on the amount held in an instant access account at the bank or building society where the client account is kept;

e) the practice of the bank or building society where the client account is kept in
relation to how often interest
is compounded.'

It is therefore advisable to set an interest rate which incorporates all of these factors. Even while
the bank base rate remains static, it is good practice to review
the interest policy on a regular basis to ensure that it is still appropriate: first, to ensure
the client is being paid interest properly, and second, to ensure that the practice is not 'losing
out' financially as a result of an inappropriate interest policy.

The pre-2011 Accounts Rules specifically referred to a £20 de minimis (which has since been removed) but it is common for firms to still apply a de minimis level to their interest policy. This de minimis should, of course, be 'reasonable' in accordance with the firm's administration costs in relation to the client account.

There is currently an open consultation in relation to a revision of the SRA Accounts Rules, which proposes to
reduce them from 52 rules
to 13. It is pleasing to see that
a rule specifically in relation to
'interest on client money' has been retained in the proposed revision, which demonstrates the importance of a strong interest policy to support the treatment of client interest.

Samantha Mason is a chartered accountant in the business services department at Kreston Reeves @KrestonReeves www.krestonreeves.com

Copyright & permissions