In short
Under rule 7 of the SRA Accounts Rules, a law firm must account to clients and third parties for a fair sum of interest on client money it holds for them. The rules set no rate or minimum. Firms set a written interest policy that explains how interest is calculated, and may agree a different arrangement in writing if the client has enough information to give informed consent.
Key takeaways
- Rule 7.1 requires a firm to account to clients and third parties for a fair sum of interest on client money it holds for them.
- Rule 7.2 allows a different arrangement by written agreement, but only if the firm gives enough information for the client or third party to give informed consent.
- The SRA Accounts Rules do not set an interest rate or a minimum amount below which no interest is paid, so each firm must set and justify its own policy.
- The SRA has said it expects firms to talk to clients about interest and will take action where it has evidence that firms are not accounting fairly.
- Paragraph 5.1 of the SRA Code of Conduct for Firms separately requires firms to account to clients for any financial benefit received as a result of their instructions, unless the client has agreed otherwise.
What rule 7 requires
Rule 7.1 of the SRA Accounts Rules says a firm must account to clients or third parties for a fair sum of interest on any client money it holds on their behalf. 'Account for' means pay over, or credit to the client's ledger. The duty covers third parties too, so interest on a deposit held as stakeholder or on money held for a lender falls within it.
Rule 7.2 allows the firm and the client or third party to agree a different arrangement in writing, provided the firm gives enough information for them to give informed consent. A clause buried in standard terms that says no interest will be paid, without explaining what the client gives up, is unlikely to meet that test. Paragraph 5.1 of the SRA Code of Conduct for Firms adds a broader duty to account to clients for any financial benefit the firm receives as a result of their instructions, unless they have agreed otherwise.
What 'fair' means
The rules do not define a fair sum. They do not fix a rate, a calculation method or a minimum amount, which leaves each firm to decide and to justify its decision. Most firms hold client money in a general client account, a pooled account for many clients, and the bank pays interest on the whole balance to the firm. Rule 7 does not require the firm to pass on every penny it earns, but the sum it pays must be fair to the client.
When interest rates rose, the SRA reminded firms that where there is no pre-agreed arrangement it expects them to be talking to clients about interest, noted that some firms were not accounting to clients for anything like the rate they were earning, and said that where it has evidence firms are failing to account fairly it will take action. A policy that pays clients a fraction of what the firm earns, without a clear reason, is the kind of evidence it means.
What an interest policy should contain
A written interest policy is the firm's evidence that it has thought about fairness. It should be clear enough for a client to work out roughly what they will receive, given to clients at the start of a matter, usually in the client care letter and terms of business, and reviewed whenever interest rates move materially.
The table sets out the main decisions a policy has to record and the questions a reviewer will ask about each.
| Element | What the policy decides | Question to test fairness |
|---|---|---|
| Rate | The rate paid, often linked to a published rate or to the rate the firm's bank pays | How does it compare with what the firm earns on the account? |
| Calculation | Daily balance or another method, and the period covered | Does it reflect how long the money was actually held? |
| Minimum amount | Any amount of interest below which nothing is paid | Is the minimum justified by the real cost of paying small sums? |
| Large or long-held sums | When money is moved to a separate designated deposit account for one client | Does a client with a large balance get close to the market rate? |
| Third parties | How interest is handled for stakeholder money and lenders | Does it follow the contract or the third party's instructions? |
| Different arrangements | When the firm agrees in writing that interest is handled differently | Did the client have enough information to give informed consent? |
| Review | Who reviews the policy and how often | Was it updated when rates changed? |
General client accounts and designated deposit accounts
A general client account holds money for many clients in one pool. The firm calculates each client's share of interest under its policy and pays it from its own funds or the interest received. A designated deposit account is opened for a single client, so the interest the bank pays belongs to that client and is credited to their ledger. Firms commonly move large sums expected to be held for months, such as estate funds or litigation settlements, into a designated account.
Tax treatment differs between the two. HMRC's Savings and Investment Manual explains that interest a client receives from a designated account is the client's taxable income, and that payments of interest from a general client account are usually made without tax being deducted. Clients with significant sums should be told that interest is taxable in their hands.
Worked example: calculating interest under a policy
A 30-partner firm earns 3.25% a year on its general client account. Its policy pays clients 2.5% a year on daily cleared balances, calculated when money is paid out, and pays nothing where the calculated sum is under £50. Matters expected to hold more than £500,000 for more than three months move to a designated deposit account. The rates are illustrative; the method is what matters.
On a probate matter holding £250,000.00 for 45 days the client receives £770.55. On a purchase deposit of £30,000.00 held for 7 days the calculation is £14.38, below the minimum, so nothing is paid, which the policy disclosed at the start. The firm records the margin between what it earns and what it pays, and the reasons it considers that margin fair, such as the cost of administering the account.
| Matter | Balance (GBP) | Days held | Rate | Interest calculated (GBP) | Paid to client (GBP) |
|---|---|---|---|---|---|
| Probate estate | 250,000.00 | 45 | 2.5% | 770.55 | 770.55 |
| Litigation settlement | 85,000.00 | 21 | 2.5% | 122.26 | 122.26 |
| Purchase deposit | 30,000.00 | 7 | 2.5% | 14.38 | 0.00 (below £50 minimum) |
| Estate funds in designated account | 620,000.00 | 120 | Rate paid by the bank on the designated account | Credited by the bank | All of it |
Interest on money held for third parties
Rule 7 applies to third parties as well as clients. On a deposit held as stakeholder between exchange and completion, the contract usually decides who receives the interest, and the firm should follow it. On mortgage advances, the lender's instructions govern. Money held to a sender's order, such as funds sent by another firm pending an undertaking, remains subject to the fair sum duty unless agreed otherwise.
Different arrangements under rule 7.2 are common in commercial work, where a sophisticated client may agree in writing that interest will be calculated differently or not paid at all in return for lower fees. The agreement should record what the client was told, so that informed consent can be shown later. Our conveyancing client money guide covers how deposits and lender funds are held.
Common mistakes
The mistakes accountants and the SRA find are mostly about drift: a policy written years ago at a different rate and never reviewed, a minimum amount set high enough to mean almost no client ever receives interest, a policy published on the website but not applied consistently by the accounts team, and interest overlooked entirely on money held for third parties.
The fix is the same in each case. Review the policy when rates move, test a sample of closed matters each quarter to check that interest was calculated and paid as the policy says, and record the reasoning. Paragraph 2.2 of the Code of Conduct for Firms requires firms to keep records that show compliance, and a clear rationale makes a challenge to fairness much harder to sustain. For the wider rules, see our guide to the SRA Accounts Rules and the SRA accountant's report.
Safeheld reconciles client money every day for regulated firms, works every difference to its cause and keeps the record auditors ask for, and is extending that work to law firm client accounts. If your firm holds client money under the SRA Accounts Rules, talk to us about SRA client money.
Frequently asked questions
Do solicitors have to pay interest on client money?
Yes. Rule 7.1 of the SRA Accounts Rules requires firms to account for a fair sum of interest on client money held for clients and third parties, unless a different arrangement is agreed in writing.
What is a fair sum of interest?
The rules do not define it or set a rate. Each firm sets a written policy and must be able to justify it as fair, taking account of what it earns and the cost of administration.
Is there a minimum amount below which solicitors do not pay interest?
The SRA Accounts Rules do not set one. Firms may set a minimum in their policy, but it must be fair and disclosed to clients.
Can a solicitor keep the interest on my money?
Only part of it under a fair policy, or all of it if you agree in writing after being given enough information to give informed consent.
Is interest from a solicitor's client account taxable?
Interest a client receives is generally the client's taxable income. HMRC's manual explains that interest from a general client account is usually paid without tax deducted.
What is a designated client account?
A client account opened for one client, where the interest the bank pays belongs to that client. Firms often use one for large sums held for long periods.
References
- SRA Accounts Rules
- SRA Code of Conduct for Firms
- SRA Update 126: Interest rates
- HMRC Savings and Investment Manual, SAIM2180: Interest: solicitors' client accounts
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.