By Legal Futures Associate dospay
Solicitors participate in all sorts of transactions involving large sums of money. Whether from a business exit, a divorce, or the sale of a significant asset (property/yacht/aircraft), the larger firms will often handle transactions running into the tens and hundreds of millions of pounds.
At the end of each of these transactions, one of the final duties of the firm or independent solicitor is to pay the proceeds over to the client themselves.
What duty does the firm or independent solicitor owe to a client who directs the firm to pay the proceeds to an e-money (eg, Wise, or until very recently, Revolut) or, for example, a few years ago to Silicon Valley Bank once the writing was on the wall?
Does a firm’s duties extend to ensuring that the client understands the risks posed to their hard-earned funds by such an arrangement? We think so.
Rule 5.2: The duty to safeguard
Rule 5.2 of the SRA Code of Conduct for Firms already the firm to ‘safeguard’ money and assets entrusted to the firm by clients and others.
Under the SRA Accounts Rules, Rule 5.2 of those rules enshrines a further duty to “appropriately authorise and supervise” withdrawals from a client account. What might this mean?
Rule 8 of the Accounts Rules already requires comprehensive, accurate, contemporaneous and chronological record-keeping, and Rule 5.2 of the Code of Conduct for Firms requires them to ensure that, for example, there are multiple signatories on client account bank transactions and that the funds are kept separately from the firm’s own funds.
It is possible, and indeed probable, therefore, that the inclusion of this language (to “appropriately authorise and supervise” withdrawals) within the Accounts Rules themselves imposes or implies some sort of further duty – every word of those rules is there for a reason.
Low risk, low reward? Electronic money institutions
The biggest electronic money institution in the UK at the time of writing is almost certainly Wise (formerly TransferWise). Before Revolut received its UK banking licence in July 2024, it may well have been a contender for that position.
Electronic money institutions can, in principle, hold balances for clients of any amount. Wise says there is no limit (save for a couple of exceptions), and while Revolut’s limit under its banking licence is limited to £50,000 per annum while it remains in “Authorisation with Restrictions” mode, it can continue to offer deposits of any value under its existing electronic money licence.
Counter-intuitively, these ‘lesser’ authorisations (it costs less money, takes less time and involves less red tape to receive authorisation as an electronic money institution) provide far higher client protections than ‘actual’ banks.
Electronic Money Institutions are required to safeguard their own clients money (much like law firms must), and segregate it away from their own funds. They must also maintain ‘living wills’ – detailed instructions to an administrator how to ascertain whose funds are whose, and how to unwind their affairs in the event of insolvency – and regulatory capital to ensure that the administrator will have sufficient resources to do so. In the event of an Electronic Money Institution’s insolvency, a client should receive 100% of their funds back.
The quid pro quo of this protection, however, is that Electronic Money Institutions are not able to use client funds to generate returns – this means that they cannot normally pay any useful amount of interest.
Zero-risk deposits
The Financial Services Compensation Scheme
All UK regulated banks are covered by the Financial Services Compensation Scheme (FSCS) for deposits of up to £85,000 per person, per financial institution. There is also a measure to protect balances of up to £1 million following a ‘life event’ (a house sale, divorce or inheritance), but this is a time-limited protection valid only for 6 months.
For clients receiving a large sum of money from their liquidity event, therefore, they will need to either spread the risk around various banks (and aggregators such as Flagstone can assist with this very readily with a minimum deposit of just £10,000, on which they charge anywhere from 0.25% to 0.30% of the interest received from each underlying institution), or to recognise that some of their funds remain at risk to the bank’s underlying solvency.
Opinion: Flagstone operate a consumer-friendly platform, suitable for private clients or businesses, which can allow the client to leverage all of the available FSCS limits.
At the time of writing, the maximum deposit at an individual bank was £15 million, and five further banks were offering up to £10 million limits (so £65 million could be covered relatively readily).
National Savings & Investments (ns&i)
Backed by HM Treasury, ns&i provides 100% security on all deposits. They offer premium bonds and direct saver accounts for amounts of up to £2 million. For lower sums, this is the recommended place for clients to safeguard their cash.
DOS & Co. Cash Deposit Manager
For larger sums, from £1 million upwards, DOS & Co., a Certified B Corporation in London specialising in the establishment and operation of UK single family offices, offers zero-risk, high-interest deposits held in cash and unencumbered at the Bank of England.
These accounts pay as much as 85% of the Bank of England Base Rate, varying with that rate, and DOS & Co. will work with your clients to build a blend of instant-access, notice and fixed-term accounts (all held in the same way) to maximise the total return for clients while maintaining flexibility for their plans.
Each account is held on bare trust for the client (avoiding any risk from DOS & Co.’s own insolvency) and in the client’s own name. Accounts are available for individuals or businesses for deposits of £1 million upwards, but there is no upper limit and that minimum balance must only be maintained for three months from account opening.
They consider this to be the perfect ‘Day 0 Deposit’ option – when clients are choosing where to have their funds paid, they will often be revelling in the relief of the completion of the transaction. Almost all financial advisors and accountants would, at that point, recommend some time for the client to evaluate their newfound wealth and decide on how best to deploy it. Wealth managers and investment managers will be lining up to offer high returns on the funds, but it is always recommended that the client separate the immediacy of the transaction from the longer-term future planning – moving wealth managers or changing investments always involves exit costs, so the prudent client will wait until their head is most clear before making these sorts of decisions.
During that period of reflection, DOS & Co. consider that the Bank of England is exactly the right place to safeguard the funds before some or all of them are potentially moved to another wealth manager or investment manager to generate a larger, longer-term return with a different risk profile. At that point, DOS & Co. remains able to retain the client’s cash holdings on the ongoing high-interest, zero-risk basis while active wealth managers, or even a new family office (on which DOS & Co. can provide consultancy and advice) are established.
TL;DR – The best high-interest, zero-risk deposits
The ‘best’ recommendations you can make to a client will depend on the amount. At present, clients can expect to get more than 4% on their deposits with absolutely no risk at all.
In satisfying the Rule 5.2 duty to appropriately supervise clients’ deposit requirements, high-service law firms will wish to make reasoned and appropriate recommendations if asked. We consider the best two options on the market at the moment to be:
For amounts up to £1 million: National Savings & Investments
National Savings and Investments (ns&i) currently (2nd September 2024) pay 4.00% gross on their Direct Saver account, with money that can be accessed at any time without notice or penalty. There is a maximum amount of £2 million per person that can be held.
For amounts from £1 million upwards: DOS & Co. Cash Deposit Manager
DOS & Co., a Certified B Corporation in London, offers zero-risk, high-interest deposits held in cash and unencumbered at the Bank of England, which pay as much as 85% of the Bank of England Base Rate, varying with the rate, and they work with your clients to build a blend of instant-access, notice and fixed-term accounts (all held in the same way) to maximise the total return for clients while maintaining flexibility for their plans:
- High-Interest, Zero-Risk Private Client Deposits
- High-Interest, Zero-Risk Corporate Deposits
- High-Interest, Zero-Risk Fees in Advance Deposits for Independent Schools
