Emma Abbotts, accounts senior manager at Prime Accountants Group, says there is increasing scrutiny from the regulator, the Solicitors Regulation Authority (SRA), around the rules concerning how solicitors handle the interest accrued as a result of holding client funds.
Her comments follow a consultation launched by the SRA, which said law firms shouldn’t be able to profit from holding money on their clients’ behalf and there was no compelling evidence it was in the interest of the consumer.
The SRA is considering changes to its rules to prevent firms retaining this interest and Emma said recent work carried out by Prime pointed to this becoming an increasingly important issue.
Some UK accountancy firms, including Prime, carry out SRA audits on behalf of their solicitor clients. This process gives the solicitors an impartial opinion reported in the form of an Accountants’ Report.
A review of transactions is conducted annually to ensure the SRA accounts rules are being adhered to, and SRA rules are in place to protect client money held by the solicitors.
At present, the SRA rules dictate solicitors must pay their clients a ‘fair’ sum of interest earned on their money, but there is no legal definition of ‘fair’ in practice.
Emma said: “It’s an ongoing debate which has gathered much more traction in the wake of interest rates rising.
“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.”
Emma said that apart from the moral argument, it was vital for solicitors to consider the issue both from a cashflow perspective and the potential knock-on effect for their clients.
“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.
“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.”
The Law Society has estimated that firms could have earned as much as £27 million in interest in the 2022-23 tax year.
In some cases, solicitor firms retain some of the interest earned to allow them to keep their fees down and improve affordability as it covers administrative costs for holding the client funds and managing it.
“We want our solicitor clients and the wider industry to consider, if the regulator decides to change the rule, how this impacts on their cashflow and profitability to ensure they remain a strong and successful business that services their clients effectively,” added Emma.
For more information on Prime Accountants Group, which has offices in Solihull, Birmingham and Coventry, search for Prime Accountants Group on social media.
Pictured: Emma Abbotts, accounts senior manager at Prime Accountants Group, who is advising solicitors to be aware of possible sanctions on interest from client funds.
