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  1. Home
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  4. Issues
  5. January 2017
  6. What to do about client interest?

What to do about client interest?

With interest rates close to zero, how does this impact on proper practice regarding funds held for clients? The Professional Practice team answers
16th January 2017 | Russell Eadie

In the current climate, Professional Practice has had a number of queries from members about how to deal with the increasing problem of the small amount of interest payable on funds held for clients. With interest rates at the very low rate of 0.25% since 4 August 2016 when the Bank of England cut them, questions are being asked about how this should be dealt with on a day-to-day basis.

Rules and guidance: overview

Rule B6.10 sets out the detail of the rule that applies, but the guidance on that rule (both can be accessed via www.lawscot.org.uk/rules-and-guidance/table-of-contents/) includes the following:

“How does this rule work?

“The Society has opted to avoid stating fixed periods and levels of client balances regarding the earning of interest. Instead, sums must now be invested when the amount of interest which could be earned exceeds the level prescribed by Council which is currently £100.”

Since the cut, some firms have been advised by their banks that they will no longer receive any interest on balances held in client accounts. For good reasons, this may impact on client expectations and this needs to be managed to maintain good relationships.

Against that background, solicitors should be reviewing their terms of business to check whether any terms relating to interest need to be amended. Where terms have already been issued, solicitors may want to raise this with clients to make clear any changes in the likelihood of them receiving interest.

Rule B4 (client communication) and guidance on the rule do not require solicitors to make any reference to interest in their terms of business, but solicitors who do have such references, or solicitors who expect to hold large balances for their clients, should think seriously about raising this situation with their clients. As part of a general note on good habits, the guidance on rule B4 states: “It is recommended that the content of terms of business letters is kept under regular review”.

Time to transfer?

One practical question to ask is whether firms who have client funds placed in specified deposit accounts but are now getting no interest paid on them should be uplifting these funds and returning them to their client bank account if they are still getting interest on funds in their client bank account.

This matter was considered by Professional Practice recently and the following views expressed:

  • According to the accounts rules (as already mentioned), a firm does not need to invest client funds in a named investment account unless it is estimated that the prescribed minimum of interest will be earned – currently £100.
  • If no interest is payable (at present) on such accounts available to the firm from their existing bank, step 1 cannot be necessary any more.
  • If the firm wishes to transfer the client funds back to the firm’s general client account, this would be to the client’s benefit because at least some interest would be earned. However, there is nothing in the accounts rules that actually requires this to happen.
  • The firm should also consider checking whether better rates are available elsewhere which would justify a shift to another account.
  • If the firm is transferring funds back to the firm’s general client account, this may not be in the client’s best interests if there would be a large administration fee chargeable to the client to cover the costs of the transfer.
  • The firm should consider what interest and investment provisions are set out in the terms of business with the client, as those contractual terms may govern where the firm places the client’s funds.
  • If it is proposed to do anything with the client funds which is not in accordance with the terms of business, the firm must consult with the client in order to obtain the client’s agreement to the proposal. It may well be prudent to consult with the client in any case where interest issues arise in light of the recent developments.

The Author

The Professional Practice team can answer any further enquiries on these issues. The email address is ProfPrac@lawscot.org.uk and telephone number is 0131 226 8896. Russell Eadie is a senior solicitor in the Professional Practice team 
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