As interest rates continue to be in the forefront of the news, as the Bank of England, Monetary Policy Committee (MPC) raised rates again in August for the 14th time in a row, now standing at the highest they have been since 2008. Now is a good time to review interest policies and review the basis for calculating the rate interest to ensure it is still appropriate.
The Solicitors Regulation Authority (SRA) requires law firms to pay clients a fair rate of interest for any client money held. In practice there are three methods of holding client funds:
- Designated deposit accounts
- Undesignated client accounts
- Virtual client accounts
The most popular way of holding client monies is the undesignated client account, usually referred to as general client account. Operating a general client account avoids lost time due to opening and closing of multiple designated deposit accounts and also by pooling the funds, the higher balance tends to attract a higher level of interest.
Interest earned on these accounts is paid into the office account of the law firm. The firm must then decide what is an appropriate amount to pass back to clients. As per rule 7.1 of the Accounts Rules, this should be fair.
What is considered fair?
There is no further guidance on what is considered fair in the accounts rules, so most firms have opted to link the interest policy to the Bank of England base rate or to a commercial rate available from specific banks. If firms had to pay out on this basis on every client balance held, this would become a huge administrative burden on the firm.
The previous accounts rules included a mandatory set de minimis of £20, most law firms continue to adopt a previously mandated amount although no amount is now given in the rules. However, is now the time to review the de minimis and amend written interest policies with the increase in interest rates?
As rates continue to rise, de minimis limits will be more frequently exceeded and will become more of an administrative burden on law firms, and we have seen an increase of the de minimis amounts set, but what is fair? That really does depend on your client base, but we have seen clients increasing to £50 and it's doubtful that anyone would argue that is unreasonable.
If your accounting package automatically calculates interest, ensure that the system is updated for any changes. Most law firms now find it easier to apply interest rates at the end of a matter, rather than at regular intervals. This should be made clear in your interest policy what the end of a matter is, completion or file closure.
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