SRA Handbook

When interest must be paid

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Rule 22: When interest must be paid

22.1

When you hold money in a client account for a client, or for a person funding all or part of your fees, or for a trust, you must account to the client or that person or trust for interest when it is fair and reasonable to do so in all the circumstances. (This also applies if money should have been held in a client account but was not. It also applies to money held in an account in accordance with rule 15.1(a) (or which should have been held in such an account), or rule 16.1(d).)

22.2

You are not required to pay interest:

(a)

on money held for the payment of a professional disbursement, once counsel etc. has requested a delay in settlement;

(b)

on money held for the Legal Services Commission;

(c)

on an advance from you under rule 14.2(b) to fund a payment on behalf of the client or trust in excess of funds held for that client or trust; or

(d)

if there is an agreement to contract out of the provisions of this rule under rule 25.

22.3

You must have a written policy on the payment of interest, which seeks to provide a fair outcome. The terms of the policy must be drawn to the attention of the client at the outset of a retainer, unless it is inappropriate to do so in the circumstances.

Guidance notes

(i)

Requirement to pay interest

(a)

Money is normally held for a client as a necessary, but incidental, part of the retainer, to facilitate the carrying out of the client's instructions. The main purpose of the rules is to keep that money safe and available for the purpose for which it was provided. The rules also seek to provide for the payment of a fair sum of interest, when appropriate, which is unlikely to be as high as that obtainable by the client depositing those funds.

(b)

An outcomes-focused approach has been adopted in this area, allowing firms the flexibility to set their own interest policies in order to achieve a fair outcome for both the client and the firm.

(c)

In addition to your obligation under rule 22.3, it is good practice to explain your interest arrangements to clients. These will usually be based on client money being held in an instant access account to facilitate a transaction. Clients are unlikely to receive as much interest as might have been obtained had they held and invested the money themselves. A failure to explain the firm's policy on interest may lead to unrealistic expectations and, possibly, a complaint to the Legal Ombudsman.

(d)

The Legal Services Act 2007 has abolished the distinction in the Solicitors Act 1974 between interest earned on client money held in a general client account or a separate designated client account, and therefore interest earned on the latter type of account is to be accounted for like interest on any other client money on a "fair and reasonable" basis. In practice, a firm which wishes to retain any part of the interest earned on client money will need to hold that money in a general client account and continue to have interest paid to the office account (see rule 12.7(b)). The tax regime still requires banks to deduct tax at source from interest earned on separate designated client accounts based on the tax status of the individual clients, making it impracticable to retain any part of the interest earned on that type of account.

(e)

Some firms may wish to apply a de minimis by reference to the amount held and period for which it was held, for example, providing that no interest is payable if the amount calculated on the balance held is £20 or less. Any de minimis will need to be set at a reasonable level and regularly reviewed in the light of current interest rates.

(f)

It is likely to be appropriate for firms to account for all interest earned in some circumstances, for example, where substantial sums of money are held for lengthy periods of time.

(g)

If sums of money are held in relation to separate matters for the same client, it is normally appropriate to treat the money relating to the different matters separately but there may be cases when the matters are so closely related that they ought to be considered together, for example, when you are acting for a client in connection with numerous debt collection matters. Similarly, it may be fair and reasonable in the circumstances to aggregate sums of money held intermittently during the course of acting for a client.

(h)

There is no requirement to pay interest on money held on instructions under rule 15.1(a) in a manner which attracts no interest.

(i)

Accounts opened in the client's name under rule 15.1(b) (whether operated by you or not) are not subject to rule 22, as the money is not held by you. All interest earned belongs to the client. The same applies to any account in the client's own name operated by you as signatory under rule 10.

(ii)

Interest policy (rule 22.3)

(a)

It is important that your clients should be aware of the terms of your interest policy. This should normally be covered at the outset of a retainer, although it may be unnecessary where you have acted for the client previously. It is open to you and your client to agree that interest will be dealt with in a different way (see rule 25).

(iii)

Unpresented cheques

(a)

A client may fail to present a cheque to his or her bank for payment. Whether or not it is reasonable to recalculate the amount due will depend on all the circumstances of the case. A reasonable charge may be made for any extra work carried out if you are legally entitled to make such a charge.

(iv)

Liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes

(a)

Under rule 8, Part 3 of the rules does not normally apply to liquidators, etc. You must comply with the appropriate statutory rules and regulations, and rule 8.3 and 8.4 as appropriate.

(v)

Joint accounts

(a)

Under rule 9, Part 3 of the rules does not apply to joint accounts. If you hold money jointly with a client, interest earned on the account will be for the benefit of the client unless otherwise agreed. If money is held jointly with another practice, the allocation of interest earned will depend on the agreement reached.

(vi)

Failure to pay interest

(a)

A client, including one of joint clients, or a person funding all or part of your fees, may complain to the Legal Ombudsman if he or she believes that interest was due and has not been paid, or that the amount paid was insufficient. It is advisable for the client (or other person) to try to resolve the matter with you before approaching the Legal Ombudsman.

(vii)

Role of the reporting accountant

(a)

Paragraph 2.8 of the Guidelines for accounting procedures and systems at Appendix 3 states the need for policies and systems in relation to the payment of interest.

(b)

The reporting accountant does not check for compliance with the interest provisions but has a duty under rule 40 to report any substantial departures from the Guidelines discovered whilst carrying out work in preparation of the accountant's report. The accountant is not, however, required to determine the adequacy of a firm's interest policy (see rule 41.1(d)).