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Summary ULAW LPC, Solicitors Accounts Chapter Readings
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ULAW LPC, Solicitors Accounts Chapter Readings
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Intro to PP – WS2 Solicitors Accounts TIFF LIAOChapter 15 – Accounting to the Client for Interest Page 169
INTRODUCTION
Solicitors may hold money belonging to other people for substantial periods of time.
Inevitably some of those people will wonder whether they’re entitled to be paid a sum in lieu of the interest they might
otherwise be earning on that money.
Principles 5 and 7 require those providing regulated services to act with integrity and in the best interests of the
client, so it will frequently be appropriate for firms to account to clients for interest on client money held.
SUMMARY
Clients are normally entitled to interest on client money held by firms providing legal services.
The firm can use one of two methods to meet the obligation to account for interest.
(1) The firm can open a separate deposit account designated with the name of the client and account to the client
for all interest earned on the account.
(2) The firm can pay the client interest from the business bank account – the amount due is calculated by
reference to the firms policy and must be a fair sum.
A firm which pays interest from the business bank account will be out of pocked UNLESS it puts a proportion of the
money in the client bank account on deposit. The Solicitors Act 1974 allows solicitors to keep the interest earned on
client money placed on general deposit.
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, Intro to PP – WS2 Solicitors Accounts TIFF LIAO
Chapter 15 – Accounting to the Client for Interest Page 169
THE OBLIGATION TO ACCOUNT
Paragraph 1.2 of the Code of Conduct for firms requires: You do not abuse your position by
taking unfair advantage of clients or others.’
Paragraph 5.1 of the Code requires: ‘You properly account to clients for any financial benefit
WHEN MUST A you receive as a result of their instructions, except where they have agreed otherwise.’
FIRM
ACCOUNT FOR On general principles, it would clearly be wrong for firms to earn interest on money held in the client
INTERST? bank account without accounting for the benefit to clients.
Rule 7.1 of the Accounts Rules states specifically that firms MUST ‘account to clients or third
parties for a fair sum of interest on any client money held by you on their behalf, unless you
have reached a separate agreement with your client’.
Rule 7.2 states that firms ‘may by a written agreement come to a different arrangement with the
client or the third party for whom the money is held as to the payment of interest’ but they must
provide the client/3rd party with ‘sufficient info to enable them to give informed consent’.
NEW RULES
- require firms to set their own policy on the circumstances in which it is fair to account to clients for
interest and how such interest is to be calculated.
- The terms of the policy should be drawn to the client’s attention at the start of the retainer unless
it is inappropriate to do so, for example where the client has a continuing relationship with the firm.
- Such a policy is likely to provide that interest will be accounted for UNLESS it is less than a stated
figure, say £20 or less. The figure will need to be set at a reasonable level and reviewed in the
light of current interest rates.
Two possible ways, firms can choose to pay client money either into a:
(1) Separate deposit bank account – designated for money of that particular client.
(2) general bank account .
= whatever they choose to do, the requirements under the Rules is the same – interest allowed
HOW DO must be a ‘fair sum’.
FIRMS DEAL
WITH Firms will usually open a separate designated bank account for a particular client’s money when
INTEREST? they recognise that they will be holding a substantial amount for a significant time and simply
want to pass on to the client all the interest allowed by the bank.
In the past: the income tax rules applying to bank interest made it impracticable for firms to
retain any part of the interest earned. This was because, for tax years before 2016/17, banks
deducted basic rate tax at source from interest earned on separate designated client accounts
(subject to the tax status of the individual clients) and credited the net amount to the separate
designated account.
For tax years 2016/17 onwards, banks and building societies pay all interest gross. It is
likely, however, that firms will continue to account to clients for all interest earned on
money in specially designated accounts given the obligation to act in the client’s best
interests.
Where a client’s money is left in the general client bank account, the firm has to decide by
reference to its policy whether to allow interest and how to calculate it.
The sum decided upon will be allowed from the business bank account and is, in effect,
an expense of the business – a well-run firm will cover the expense by earning interest on
client money and having that interest paid into its business bank account
When the firm opens a separate designated client bank account, the bank calculates the
amount and pays the amount of interest earned.
FACTORS If such an account is not opened, the firm has to pay an appropriate amount in lieu of interest from
AFFECTING the business bank account. It might seem, therefore, that it is always preferable to open a
CHOICE OF separate designated client account. However, this is not so.
METHOD O A firm which opened a separate designated client bank account for every client for whom money
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