Interest Income on Client Monies: SRA Guidance

From December 2021 until August 2023 the Bank of England raised interest rates from a historic low of 0.1% to 5.25%. As a result, many law firms are now receiving significant amounts of interest income on client monies.

Fair Sum of Interest

How has the interest rate been calculated and is it benchmarked against bank interest rates?

The SRA has commented on this recently, highlighting that firms need to consider whether the interest paid on client monies is appropriate. The SRA Accounts Rules make reference to a "fair sum" of interest to be paid to clients.

Policy and Calculation

Does your firm have a policy for interest income and is it appropriate?

Firms should be communicating the interest arrangements to their clients. The SRA will take action if they have evidence that the interest paid over is not fair, and to avoid this risk firms will need to consider interest carefully and document their rationale.

Future Forecasting

Beyond the interest paid over, firms should consider how the interest income has been treated from a forecasting and cash distribution perspective. Whilst the income received by firms is welcome, firms should not be placing reliance on this income recurring in future periods. For many firms, profit levels are being maintained by the generation of net interest income on client monies - this situation is unlikely to persist.