Edwards: Triple-whammy loss for clients
Law firms are could have made as much as £1.3bn in interest on client money in 2022/23, it has been claimed amid scrutiny of what they pass on to clients.
“Bereaved families are among thousands of people being cheated out of interest on their own money by solicitors”, according to a study by personal finance website Finder.
It found that some firms kept the first £250 of interest, and others paid a “miserly” 0.3% to clients.
Finder cited the Law Society’s 2024 financial benchmarking survey, which revealed that total net interest income across 147 firms, more than two-thirds of which had turnovers of under £10m, rose from £2.6m in 2022 to £27.5m in 2023.
It extrapolated this to suggest that the 7,000 firms that handle client money could have made as much as £1.3bn in interest during the period surveyed (the year to 31 March 2023). “This is a rough estimate because the survey was biassed towards firms with a high turnover,” it cautioned.
As the Bank of England base rate rose to 5% in June 2023, “figures in the survey that reports next year could be even higher”, Finder speculated.
In response to the survey, the Solicitors Regulation Authority (SRA) was moved in April to remind law firms of the approach they should take to client interest. The basic rule is that firms must account to clients for a “fair sum of interest”, but ‘fair’ is not defined.
The SRA said it had been told that some firms were not accounting to their clients “for anything like the same rate of interest [as they get], and certainly not what could reasonably be classed as ‘fair’”.
However, an SRA spokesman told Finder it had not received complaints about the issue.
Finder said it checked interest offered on client accounts suitable for solicitors earlier this month and found rates between 1.66% and 1.96% AER (annual equivalent rate) for those depositing £1m or more at big banks.
But Buckinghamshire Building Society was paying 2.7% AER (variable) and “an industry insider told us that it was possible for firms to get around 4.8% – even after the August base rate drop – but banks rarely advertised such deals”.
Finder also looked at the interest policies of six regional and national law firms. One said it would keep all interest unless it topped £250, another that it would pay clients interest at “up to 0.3%”, with nothing paid unless the total amount topped £100, and a third stated it would always pay 0.5% less than it received from the bank.
The other three cited a rate of 1% or “up to 1%”, and none of the six passed on any interest earned below £50.
Finder said it asked the Law Society if firms paying interest to clients of less than 1% while they were receiving well above that figure should increase what they pass on to clients. “A spokesperson replied that firms should comply with the SRA’s rules.”
Finder noted that, as revealed by Legal Futures, the Ministry of Justice is exploring how firms are using interest from client accounts and whether it could be diverted to support free legal advice.
Liz Edwards, a money expert at Finder, said: “Looking through solicitors’ policies was an eye-opener. How can any firm simply decide to pocket £250 of someone else’s money and claim that’s fair?
“For clients, it’s a triple-whammy loss when solicitors have their cash for a long time: they don’t have the use of the money; each day the money is worth less – especially when there’s high inflation – and they lose decent interest they would have got if they’d been able to put it in a savings account while rates are as high as they currently are.
“I know a family who had their probate granted last September and then raised the issue of interest with their solicitor, who had had many thousands of pounds of the family’s money in their client account for at least a year and a half.
“The solicitor seemed surprised and said the point had not been raised – it was quite clear he’d had no intention of paying interest on the money.”
The website provided users with guidance on how to complain if they thought their solicitors have not given them a fair rate of interest.
The question of whether solicitors should continue to hold client money is being looked at as part of the SRA’s consumer protection review.
Speaking on a Legal Futures webinar in May, SRA chief executive Paul Philip said the cost of regulation would “drop like a stone” if solicitors were not allowed to hold client money.
The writer of this article needs to do a little more to try and understand the legal accounts rules. A solicitor’s client account must be readily available to draw on – so must be treated akin to an instant access account. It must not be used as a bank account for ‘banking only’ purposes – so the interest rate payable to a client cannot exceed rates for instant access at their own bank – otherwise clients would deposit as much as they could with solicitors for a better rate of return. Essentially, it’s a damned if you do, damned if you don’t situation.