We interviewed Paul McCluskey of specialist banking and finance consultancy Gemstone Legal, about the SRA’s recent reminder to law firms about paying interest to clients.
Jonathan Bray: Paul, the SRA’s recent update highlighted a 1000% increase in interest received on client funds. Can you clarify the real impact of this for law firms?
Paul McCluskey: Absolutely, Jonathan. While the headline suggests a substantial increase, the reality is more nuanced. For years, rates have been exceptionally low, so even a 1000% increase only brings them to relatively modest levels. It’s important to view these changes within the broader context of current interest rates.
JB: How significant is the earning of interest on client money given the typical durations these funds are held?
PM: The SRA pointed out that client funds are often held for short durations, making the interest not significantly impactful, especially in contexts like conveyancing. However, regardless of work types a law firm’s client account will have a particular level that the balance never falls below. It is here that firms can structure funds to generate improved income.
JB: There’s clearly a concern about the fairness in how firms handle this interest. What’s your take on this?
PM: That’s a valid concern. Law firms should maintain transparency and fairness. They can achieve this by having a clear policy and develop an understanding of what fair means. For example I have seen guidance suggesting law firms match the rate paid to a personal account with their parent bank. In some instances, this can be higher than the rate paid on client funds so the firm actually loses money in this situation. There is a much simpler method which guarantees fairness for both parties.
JB: With the SRA warning about fair practice, what should law firms do to ensure compliance and fairness?
PM: The guidance from the SRA is not new. Since the classification between designated funds and undesignated funds were removed firm have been able to hold monies in a pooled client account and pay the client a fair sum in lieu of interest earned. The strategy here is to ensure the client would receive the same level of interest as they otherwise would have achieved had funds been placed in a client account in the client’s own name.
JB: Lastly, what strategies should law firms adopt in light of these updates to optimise their handling of client money?
PM: It’s never just about rate so the starting point is to talk to their bank and ask for a higher rate. Based on the response, the firm can then look around and see what is available. It is here the complexity begins. The firm needs to understand the service expectations. Is the service online? Is the online service good? Will the finance team be happy? Will moving part of the funds to a different bank cause issues for the cashier? Is it worth my time? Is the new product constituted as a client account? Is the secondary bank secure and how do I even assess the financial strength of a bank? Etc etc etc. It is due to the many questions that Gemstone Legal exists. We don’t just find a rate, we make sure the end to end service meets the needs of the firm. Getting it wrong could be very costly for the firm and I guess this is the reason why so many firms are missing out.
Contact us to assess your client account interest rates.
