Commission Arrangements on Designated Client Accounts
“Global Investments Schemes”
The Society is often asked for advice in relation to solicitors setting up and operating “global” investment schemes, where the firm has an option of how much interest is payable to the client and how much to the firm.
The Society does not approve or disapprove of any individual scheme offered by specific providers. The following guidance relates to “global investment schemes” generally.
Separate accounting
While the funds invested for clients earn interest based on the total sum invested for all clients, it is essential that individual accounts are maintained for each client.
The statements produced must specify the name of the client in the title and the interest applied to that client must be directly applied to that account. This is no different from any other invested funds account or statement.
Interests of the clients
The interests of the client must come first. If there is an element of discretion in how much interest is paid to the client and therefore how much commission is paid to the firm, you must ensure that the client gets at least as good a rate as they would if you did not have that discretion.
In general terms, they should earn at least an equivalent to the current available “high street” rate of interest.
Disclosure
There is a requirement to disclose to the client that your firm will benefit from a share of the interest payable on their invested funds.
It would normally be sufficient to include a section within your terms of business explaining when funds held for a client would require to be invested to earn interest for that client and outlining the way the scheme operates.
The fact that the total interest earned is shared between your firm and the client should be specifically disclosed.
The firm may refer to the rate paid to the firm as a percentage of the rate paid to the client in relation to the base rate, which would avoid the need for constant amendments with each rate change.
If clients request more specific information you should provide it.
Including the information in terms of business will only work if all clients are issued with terms of business, at commencement of a transaction and regardless of the nature of the business undertaken. In terms of the
Solicitors (Scotland) (Client Communication) Practice Rules 2005 there is already a requirement to provide written information to clients in all cases, with very limited exceptions.
Written Approval
Duplicate copies of the disclosure, however it is made, should be issued for signature and return to be held on file. This is to satisfy the requirement of Rule 11(4) in relation to an arrangement in writing with your client.
Clients for whom funds are already held invested or where funds may be invested during the course of a transaction that has already commenced will need to be informed of the nature of the scheme. In such cases the terms of business letter will have been issued prior to implementation of the scheme and an alternative disclosure is required.
It may be practical to retain any sums currently invested, but which will be uplifted in the short term, out with the scheme to avoid having to contact the client and provide information regarding this scheme.
Further Questions
Any further questions should be directed to the Financial Compliance Department of the Society, on 0131 476 8177.
Interest Rate Change
Due to the recent interest rate decline, confirmation from the bank is required to ensure that the firm is not receiving more interest than the client under such global schemes. It may be necessary in the event that no interest is payable, to shop around or persuade the firms existing bank to pay some interest to avoid having to move the accounts elsewhere. Any further questions regarding interest should be directed to the Professional Practice Department of the Society, on 0131 476 8177.
Updated: August 2009
