It is no secret that interest rates on client and office accounts have fallen to historic lows. Many law firms are now receiving 0.01% on client monies and will feel a valued income source has all but disappeared. To make matters worse, as reported by the FT Adviser in February 2021, the Bank of England has written to UK banks giving them 6 months to prepare for negative interest rates. Further information on that can be found here.
At the time of writing, law firms still have a ‘window of opportunity’ to significantly increase the credit interest received from client monies against the standard advertised general client account interest rates.
How can this be achieved?
How can this be achieved? Outcomes Focused Regulation introduced by the Solicitors Regulation Authority in 2011, paved the way for law firms to reconsider their approach to managing client monies.
With the ability to set their own interest de-minimis, outlined within their client interest policy, the majority of law firms moved away from traditional designated accounts, instead electing to retain monies within a pooled client account. This approach empowered firms to consider the level of funds required to meet their daily payment obligations and either negotiate a higher rate with their incumbent bank for a safe amount above that level, or move those excess funds to another banking provider. This practice commonly known as ’top slicing’, enables firms to benefit by generating considerably more credit interest. Client monies are typically moved to smaller ‘challenger’ banks or local building societies who are willing to pay more than traditional high street banks.
The high street clearing banks have open access to wholesale markets where they can purchase cash more cheaply. For smaller non clearing banks, they do not have the same access to cheap sources of funding and therefore utilise deposit retail/ commercial holders as an essential method of boosting their liquidity, and will therefore pay higher interest for such deposits. Potentially up to 25 times more interest for certain amounts of client money balances. With the possibility of earning more interest on their client monies, firms that have a surplus level of client balances above operational requirements can still earn valued income for the firm and for their clients.
Is the money safe?
All banks operating in the UK must advise their customers whether funds are protected by the government’s own Financial Services Compensation Scheme (FSCS). What this legislation means is that each depositor (or client of a law firm when considering client monies) is afforded a guaranteed recovery level of £85,000 should a banking institution fail. Clients of law firms may also benefit from FSCS legislation called ‘Temporary High Balances’ which covers depositors up to £1m for the first 6 months funds are received into a client account. Paul McCluskey, founder of Gemstone Legal, client/office account specialists, advises businesses to engage with their trusted advisors to undertake this work and notes that:“Higher rates are out there. Firms are encouraged to consider their business requirements and then, if their accountants are sector specialists that understand the market, seek advice from them on how to review alternatives.
By undertaking a thorough and independent review, law firms can ensure that they are maximising returns for themselves and for their clients”.
Please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk for more information or to arrange your client money interest options review.
