Guidance related to Rule B4: Interest on Invested Funds
Interest on Invested Funds and Commission Arrangements on Designated Client Accounts "Global Investments Schemes"
Unless agreed otherwise and set out in Terms of Business or a separate letter which provides either that no interest will be earned because of current bank interest rates, or that some of the interest will be retained by the practice unit, then the matter is covered by Rule B6.10 (the Accounts etc rules). This requires interest to be earned but includes a provision that practice units and clients can agree in writing what interest will be earned on clients' invested funds, provided that agreement is made in writing in advance of the funds being deposited.
Rule B1 (the Standards of Conduct rules) are also relevant. Solicitors are the agents of their clients and must put the clients' interest ahead of their own; must avoid a conflict between their practice unit's interest and that of the client; must disclose a financial interest; and must charge fees which are fair and reasonable in all the circumstances.
An arrangement whereby the practice unit receives all or even half of the interest earned on invested funds, no matter how little that is, could leave the practice unit open to a complaint.
The Society is often asked for advice in relation to solicitors or setting up and operating "global" investment schemes, where the practice unit has an option of how much interest is payable to the client and how much to the practice unit .
The Society does not approve or disapprove of any individual scheme offered by specific providers. The following guidance relates to "global investment schemes" generally.
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 practice unit, 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.
There is a requirement to disclose to the client that your practice unit 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 practice unit and the client should be specifically disclosed.
The practice unit may refer to the rate paid to the practice unit 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 rule B4 there is already a requirement to provide written information to clients in all cases, with very limited exceptions.
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 B6.10.3 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.
Any further questions should be directed to the Financial Compliance Department of the Society.
Interest Rate Change
Due to the recent interest rate decline, confirmation from the bank is required to ensure that the practice unit 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 practice unit's 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.