Client Interest Payments

client account

Times “they are a-changing”, as some of us would still tend to say, and in this regard bank interest levels are again on the rise in a way that we have not seen since the end of the noughties. Those with longer memories will remember the days when, as one managing partner put it recently, client account interest was more than just a “nice little earner”, and instead was regarded as one of the firm’s best performing fee earners. That may well soon become the case again, though the banks have also become more parsimonious with their payment rates of late, and so depressing any optimism as to the return to the best of the good old days in this respect at least.

All of this means that a review of the payment of client interest and how it must be handled may well be rather timely. The firm’s obligations in this regard are dealt with at rule 7 of the SRA Accounts Rules 2019 which is less restrictive than in the past and instead merely obliges firms to account to the client for a “fair sum” of interest, unless there is in place a written agreement with the client providing to the contrary. Beyond this there is little official guidance on the topic.

Soon after this latest version of the Accounts Rules had come into force a number of reporting accountants started to advise firms that it would now be possible for firms to pay no client account interest at all. This was on the grounds that rule 7.2 permits firms to come to different arrangements with clients in this regard. In order to do so a written agreement with the clients would be required, providing sufficient information in order for them to be able to provide “informed consent” to this effect. The SRA were quick to renounce such suggestions, however, referring back to the revised Standards and Regulations principles that underpin the entire regulatory regime, and in particular the need to act in the “best interests of each client” at Principle 7. Whilst this does not amount to a blanket ban on firms not paying interest, it does mean that firms need to be cautious about how they deal with interest. In any event, the average client is unlikely to be able to grasp the concepts of interest retention to cover other factors that are involved and so it would be safer to limit this to “sophisticated” clients only, such as commercial clients or clients with a clear business/commercial understanding.

This leaves the challenge, however, of assessing quite what will amount to a “fair sum of interest”. This is not defined, and nor is there any clear guidance on what this might mean in any given circumstances, so it would appear to be more of a subjective decision than one that is purely objective.  The traditionally declared sum below which a solicitor could retain such sums without accounting to clients was set at £20 for many years, and from the 1998 Accounts Rules at that. It was also suggested as being a fair sum for these purposes by default in a guidance note to the then rule 22 in the Accounts Rules contained in the 2011 SRA Handbook.

Given the provisions in the current rule 7.1, however, there are now no longer any grounds for stating £20 to be the appropriate amount as opposed to any other reasonable sum. It would also have to be taken on board that £20 today is not what £20 would have been in real terms at the start of the 1990s (a point which has nonetheless been sadly overlooked by successive Governments in its determination of legal aid rates over this period of time). Rates of £100 for the trigger to account for interest earned have been encountered in major City firms where client concerns might well find even this level of payment more hindrance than help in accounting for it as income, and in such cases contracting out of the obligation altogether might be justified.

Another option might be to disregard setting a minimum level below which interest will not be paid altogether.  An alternative could be to set a percentage of the sums involved of perhaps 0.25% or 0.5%, or state that no payment will be made if the funds are held for a short period of time.  By way of an example, if a firm were to find itself holding £500,000 for 20 days and was committed to an interest rate of 0.25% this would only amount to something in the region of £70.

It should be stressed that the firm also needs to ensure that clients are aware of the amount of interest that will be paid and in what circumstances.  The obvious way in which to do this is by inclusion in the firm’s terms of business or by having a separate “interest policy” to which the client’s attention is drawn. It might also be wise to include a provision whereby the client can state that the arrangements for interest are not appropriate in their particular case, or have worked unfairly in relation to their circumstances and where the firm would be happy to consider revised arrangements for the future and retrospectively.

So far as retrospective changes to interest payments are concerned, you would need to be careful how the firm did this, if at all. It would not be acceptable for the firm simply to change the amount above which it did not account to the client without informing the client of its intention to do so.  The client will have, in theory, instructed the firm on the basis of the terms and conditions provided to them. The firm could possibly go back to the client and serve amended Terms and Conditions or notify them that this particular provision has changed but, because of the “fair sum” provision, it would need to explain to the client why the firm had done this. For this reason it is possibly better to change things going forward only, unless they are regular repeat clients in which case updating their terms would be something that you would do anyway as circumstances change. You certainly could not retrospectively change the interest policy on retrospective calculations – so if you have said £20 and over £20 of interest has already accrued then they would be entitled to that additional amount – which might make calculations even more complicated.

Finally, it should be stressed that different obligations apply to such funds that are held by way of separate designated client accounts where the client must be entitled to receive all of the interest arising since it will be regarded by HMRC as being their income and not the firm’s, and so will need to be declared to and then by them in full. So far as the firm’s general client account is concerned, however, now may be a good time to review the firm’s approach to this issue and check what is being said about it in the Terms of Business documentation.

Share on social media