What constitutes a “fair” client account interest policy for law firms?
The 2019 SRA Accounts Rules introduced several key changes, one of those being rule 7.1’s requirement to pay clients a “fair sum” of interest.
Whilst passing on interest to clients is not a new requirement, the principles-based rules are. It’s unlikely, until recently, that law firms have considered revisiting their client account interest policy due to the incredibly low levels of interest that have been earned on the client account in recent years.
Law firms are not banks. The interest earned on the general client account belongs to the firm and they are not obliged to transfer the exact amount of interest earned on to each individual client. That would create a logistical nightmare.
This leaves us with law firms being encouraged to make their own arrangements with clients, creating the dilemma of what is a fair amount of interest?
What rate should be paid?
Historic SRA guidance suggested that law firms should match the interest rate paid to clients with the designated client account rate. This rate meant that clients would not lose out on interest they would have received if their funds had been deposited into a designated account. If you’re looking for a place to start, this would be my suggestion. It’s generally considered reasonable and aligns with industry standards.
What de-minimis threshold?
To offset the basic administrative expenses, law firms often establish a de-minimis threshold, below which no interest payment will be paid. The last compulsory de-minimis was £20, and several firms continue to adhere to this figure, likely, in fear of getting it wrong. However, the rules are now inherently flexible, and it’s a firm’s prerogative to determine what constitutes “fair”. A justifiable de-minimis threshold could differ from firm to firm dependent on the client base and type of work. Given the current higher interest rates, it’s probably reasonable to elevate the threshold so it’s not reached as frequently.
Unfortunately, there are no simple answers. It’s suggested that you’re on solid ground with a de-minimis limit anywhere below £50. However, we’re in no doubt that there will be circumstances where higher amounts could be reasonably justified. Regardless of your chosen approach, it's advisable to formalise and communicate your policy both on your website and within your terms of business and review it regularly.
Sign up to receive the latest news from Larking Gowen