A chartered accountancy outfit poring over law firm books has warned that businesses could be under threat if the client money interest tap is turned off.
Emma Abbotts, accounts manager with West Midlands firm Prime Accountants Group, said that some legal practices are relying on client interest as a cashflow aid and a contribution to profits.
The Solicitors Regulation Authority consulted last year on whether it was fair for law firms to hold onto interests accrued on the client account. The Law Society’s benchmarking survey earlier this year found that more than a fifth of profit per equity partner was pure profit generated from client interest.
Abbotts, whose firm carries out SRA audits on behalf of solicitor clients, said law firms must start to make contingency plans in case the regulator stops them profiting from holding client money.
‘What we are seeing is some examples where a business is presenting itself as profit-making from the services it offers but profits are hugely inflated after a significant cash inflow of interest earned on client funds,’ said Abbotts.
‘Some solicitors rely on this interest as a significant cashflow aid and contribution to profitability. If this is removed this could make things harder financially for the firm.
At present, SRA rules dictate that solicitors must pay clients a ‘fair’ sum of interest earned on their money, but there is no concrete definition of what ‘fair’ means.
Abbotts added: ‘The notion of a “fair sum” is very open to interpretation. What you or I would class as fair may be very different to a client. Historically this hasn’t been an issue with interest rates so low for so long, but now they’re higher, there are concerns that solicitors are becoming profitable from interest earned as a result of holding client money in their accounts.’
The SRA consultation said the regulator was concerned that potential financial benefits of holding client money was driving behaviour that were not in the interests of clients.
It added: ‘We consider that it is likely to be in the client’s best interest to receive all the interest from their money, and for firms to reflect their true operating costs through the fees that they charge.’
Law firm member network LawNet strongly opposed the SRA’s rationale in its consultation response, saying the reality was that between 2008 and 2022, interest rates were so low that firms earned negligible sums. Recent higher rates, it pointed out, have helped firms absorb rising operational costs without passing them on to clients, something which the SRA had failed to acknowledge.
The network warned that removing this income source could result in higher legal fees for consumers as it is often used as an offset to the operational, regulatory and compliance costs involved in managing client money.
‘This consultation is about determining what is best for the consumer, that is the role of the SRA, but there is no rationale for removing interest on client accounts as an income source and it is irrelevant in an era of low interest rates, which has been the picture for much of the past two decades,’ said Chris Marston, chief executive of LawNet.
