MHA | Client account interest – what is fair?

Client account interest – what is fair?

Lindsey Shepherd · September 25th 2023 · read

Real Estate

With the recent increases to the Bank of England base rate of interest to the highest levels seen in 15 years and the further expected rises to rates over the coming months, a number of firms have been querying what is meant by “fair”.

What do the Accounts Rules say?

Rule 7.1 of the SRA Accounts Rules states that “You account to clients or third parties for a fair sum of interest on any client money held by you on their behalf.” There is no expectation for firms to pay over the exact amount of interest earned on client monies, with interest on the general client bank account belonging to the firm. However, in instances where a significant amount of money is held for an extended period of time, it would appear to be reasonable for interest to be paid to clients.

But what is meant by “fair” and should our interpretation of this have changed with the recent interest rate rises?

The last prescribed de minimis limit for the payment of interest under a set of Accounts Rules was £20 as it was accepted that anything less than this would be too much of an administrative burden for firms. Many firms have continued to apply this policy, but given that the introduction of the 2019 Rules was about flexibility and applying appropriate policies specific for your firm, this approach seems somewhat outdated.

With the introduction of the 2019 Accounts Rules, the SRA acknowledged that the introduction of terms such as “promptly”, “fair” and “appropriate” requires an exercise of judgement and that many firms prefer the comfort of prescriptive requirements. However, as noted above, policies adopted by firms should now be tailored to the specific circumstances of the firm.

So what should firms do?

Firms should have a written interest policy and this should ideally be publicly available (given the requirements of the wider Code of Conduct applicable to law firms). Then, there are a couple of decisions that firms need to make:

  • What is a fair rate of interest to pay to clients? and
  • What is the de minimis amount of interest that should be paid to clients?

So, in terms of rate, most firms link their interest policy to either the Bank of England base rate or rates available at a bank of choice. This appears to be a reasonable approach and one which would result in changes to the rate being paid to clients to coincide with changes in the market.

Then we come to the choice of de minimis limit – this is where a lot more judgement is involved and firms will need to give consideration to the type of clients they deal with and the typical sums of money involved. For example, a firm dealing largely with residential conveyancing where sums are not typically held for a long period of time may choose a lower de minimis limit to a firm working with large corporate entities or large probate clients.

For both decisions, the firm should document their choices and the justification for them. If the reasoning behind the policies is documented, it makes it much harder for a regulator to query the “fairness” of the policy.

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