Law firms are under increasing scrutiny for potentially depriving clients of interest earned on their money, with some firms believed to have made as much as £1.3 billion in interest during the fiscal year 2022/23.
A report from the personal finance website Finder claims that numerous bereaved families and thousands of others are being denied deserved interest by solicitors. Some law firms reportedly retain the first £250 of interest themselves, while others offer a meagre 0.3% to clients.
Finder’s analysis stems from the Law Society’s 2024 financial benchmarking survey. This data, collected from 147 firms, predominantly those with turnovers under £10 million, indicated a rise in total net interest income from £2.6 million in 2022 to £27.5 million in 2023. Based on this, Finder extrapolates that approximately 7,000 firms could have earned as much as £1.3 billion in interest in the assessed period. It should be noted, however, that this estimation may be biased towards firms with higher turnovers.
In light of rising base rates by the Bank of England to 5% by June 2023, Finder speculates that the interest figures may further increase in upcoming reports. The Solicitors Regulation Authority (SRA) responded to the survey in April by reminding law firms of their obligations to clients regarding fair interest settlements, although the definition of ‘fair’ remains vague.
The SRA has received no direct complaints but noted that some firms fail to allocate a rate of interest comparable to what they earn. Meanwhile, Finder reports that interest rates on client accounts suitable for solicitors ranged between 1.66% and 1.96% AER, with some banks offering up to 4.8% AER, although such rates are rarely advertised.
Surveyed policies of six regional and national law firms revealed varied practices, from keeping all interest under £250 to offering clients a scant interest rate of up to 0.3%, while others claim to pay 0.5% less than the bank rate. Notably, none of these firms transferred interest on amounts below £50 to clients.
The Ministry of Justice is examining the use of interest from client accounts, contemplating if it could be redirected to fund free legal advice.
Liz Edwards, a money expert at Finder, expressed concerns over these practices, questioning the fairness of pocketing client interest. She highlighted situations where long delays in handling client funds result in clients missing out on significant interest earnings, especially during high-inflation periods.
Furthermore, the Solicitors Regulation Authority’s consumer protection review includes debates on whether solicitors should continue to manage client monies.
Public responses to the report ranged widely. Gerald Shubumpkin commented on the complex nature of legal accounting rules and the necessity of maintaining liquidity akin to instant access accounts for client funds. However, Gally Maxwell countered by asserting that the principles governing client funds are distinct from current SRA rules, suggesting a need for legislative reform.
The debate over law firms’ treatment of client interest continues to attract significant attention. With potential reforms on the horizon, the question of fairness in distributing interest may see legislative changes.
