A regulatory issues expert has warned law firms holding money for clients to pass on interest earnings fairly following reports that some practices are still paying as little as 0.5% on client accounts. Solicitors Regulation Authority accounts rules require firms to pay a ‘fair’ sum of interest.

The SRA said it was not currently taking enforcement action over this issue.

With the base rate soaring from 0.1% in 2021 to 5.25% in 2023, some firms are likely to be earning significant sums of interest on client money, said RPC, a leading compliance adviser to professional firms, this week.

Firms do not necessarily have to pay clients the full value of interest earned. However Graham Reid, RPC partner and a specialist in regulatory issues, said that the SRA could take action over any unfairness.

‘Given the regulatory pressures being applied to banks and investment platforms to pay more generous interest rates to customers, it’s only a matter of time before law firms face similar scrutiny from their own regulator,’ he said. ‘Law firms will need to consider carefully whether the way they pass on to clients interest earned on their monies is “fair” or not. They will also need to be able to justify their reasoning to the SRA.’

Some law firms are paying out only 0.5% or 1% on client accounts, Reid alleged. For some, interest earned on client accounts is likely to be making a significant contribution to profits.

Reid noted that, as an alternative to accounting to the client for fair interest, rule 7.2 of the Accounts Rules allows firms to reach alternative arrangements with clients, if the client gives informed consent. ‘Firms will need to be absolutely clear in their explanations to clients about options and implications,’ he added.

‘The key messages are: Is it fair? Is it properly explained? Can you fully justify your decision-making to the regulator?’ Reid said.

An SRA spokesperson said that, as client money must be for an underlying legal purpose, in most cases it was not held for long enough to accrue significant amounts of interest.

 

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