Low interest rates and the impact on firms and client accounts
Due to the current interest rate levels, which are at an historic low, we are providing a further update for members on the accounts rules implications.
Accounts Rule 6.10 sets out the circumstances when a practice unit would be expected to place client funds in a specific deposit account to earn interest for the client.
Accounts Rule 6.10.2 then sets out that the investing of client funds into a specific deposit account will not be required if (after considering the amount of funds and the time they are to be held), the interest likely to be earned for the client would be less than an amount prescribed by the Law Society Council, which has been set at £100 since November 2011.
As interest rates have fallen since that date, fewer client balances will now require investment to comply with the rule. The setting of a prescribed limit recognises that practice units incur costs in setting up and managing specific client deposit accounts and these costs cannot be justified when only minimal amounts of interest can be earned.
Where the combination of a large client balance and the time it is to be held mean that the prescribed limit is likely to be exceeded, the practice unit should however be aware of the investment requirements of Accounts Rule 6.10. This does not mean that investment must always take place when the prescribed amount would be likely to be exceeded. Accounts Rule 6.10.2 introduces further flexibility by allowing practice units to reach alternative arrangements with their clients in advance of deposits being received. This flexibility allows consideration of such factors as account charges to be borne in mind when considering the options available for practice units and clients.
Since November 2011, practice units have been required by Accounts Rule 6.11.1 to ensure that client funds are promptly returned to clients as soon as there is no longer any reason to retain the funds. Compliance with this rule will further limit the likelihood that interest earned on a balance will exceed the prescribed minimum.
We issued a professional practice update in September which highlights the importance of reviewing the contents of terms of business documents and any wording related to interest. As set out in Accounts Rule 6.10.3, practice units should also ensure that any alternative written arrangements with clients should be agreed and documented with clients in advance.