Version 7 of the Handbook was published on 1 April 2013. For more information, please click "History" above.
When you hold money in a client account for a client, or for a person funding all or part of your fees, or for a trust, you must account to the client or that person or trust for interest when it is fair and reasonable to do so in all the circumstances. (This also applies if money should have been held in a client account but was not. It also applies to money held in an account in accordance with rule 15.1(a) (or which should have been held in such an account), or rule 16.1(d).)
are not required to pay interest:
on money held for the payment of a professional disbursement, once counsel etc. has requested a delay in settlement;
on money held for the Legal Services Commission;
on an advance from you under rule 14.2(b) to fund a payment on behalf of the client or trust in excess of funds held for that client or trust; or
if there is an agreement to contract out of the provisions of this rule under rule 25.
must have a written policy on the payment of interest, which seeks to provide a fair outcome. The terms of the policy must be drawn to the attention of the client at the outset of a retainer, unless it is inappropriate to do so in the circumstances.
Requirement to pay interest
Money is normally held for a client as a necessary, but incidental, part of the retainer, to facilitate the carrying out of the client's instructions. The main purpose of the rules is to keep that money safe and available for the purpose for which it was provided. The rules also seek to provide for the payment of a fair sum of interest, when appropriate, which is unlikely to be as high as that obtainable by the client depositing those funds.
An outcomes-focused approach has been adopted in this area, allowing firms the flexibility to set their own interest policies in order to achieve a fair outcome for both the client and the firm.
In addition to your obligation under rule 22.3, it is good practice to explain your interest arrangements to clients. These will usually be based on client money being held in an instant access account to facilitate a transaction. Clients are unlikely to receive as much interest as might have been obtained had they held and invested the money themselves. A failure to explain the firm's policy on interest may lead to unrealistic expectations and, possibly, a complaint to the Legal Ombudsman.
The Legal Services Act 2007 has abolished the distinction in the Solicitors Act 1974 between interest earned on client money held in a general client account or a separate designated client account, meaning that interest earned on the latter type of account is, in theory, to be accounted for like interest on any other client money on a "fair and reasonable" basis. In practice, however, a firm which wishes to retain any part of the interest earned on client money will need to hold that money in a general client account and continue to have interest paid to the office account (see rule 12.7(b)). The tax regime still treats interest arising on money held in a separate designated client account as belonging to the client, and requires banks to deduct tax at source from that interest (subject to the tax status of the individual client) and credit the interest to the separate designated client account. This makes it impracticable for firms to retain any part of the interest earned on a separate designated client account.
Some firms may wish to apply a de minimis by reference to the amount held and period for which it was held, for example, providing that no interest is payable if the amount calculated on the balance held is £20 or less. Any de minimis will need to be set at a reasonable level and regularly reviewed in the light of current interest rates.
It is likely to be appropriate for firms to account for all interest earned in some circumstances, for example, where substantial sums of money are held for lengthy periods of time.
If sums of money are held in relation to separate matters for the same client, it is normally appropriate to treat the money relating to the different matters separately but there may be cases when the matters are so closely related that they ought to be considered together, for example, when you are acting for a client in connection with numerous debt collection matters. Similarly, it may be fair and reasonable in the circumstances to aggregate sums of money held intermittently during the course of acting for a client.
There is no requirement to pay interest on money held on instructions under rule 15.1(a) in a manner which attracts no interest.
Accounts opened in the client's name under rule 15.1(b) (whether operated by you or not) are not subject to rule 22, as the money is not held by you. All interest earned belongs to the client. The same applies to any account in the client's own name operated by you as signatory under rule 10.
Interest policy (rule 22.3)
It is important that your clients should be aware of the terms of your interest policy. This should normally be covered at the outset of a retainer, although it may be unnecessary where you have acted for the client previously. It is open to you and your client to agree that interest will be dealt with in a different way (see rule 25).
A client may fail to present a cheque to his or her bank for payment. Whether or not it is reasonable to recalculate the amount due will depend on all the circumstances of the case. A reasonable charge may be made for any extra work carried out if you are legally entitled to make such a charge.
Liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes
Under rule 8, Part 3 of the rules does not normally apply to liquidators, etc. You must comply with the appropriate statutory rules and regulations, and rule 8.3 and 8.4 as appropriate.
Under rule 9, Part 3 of the rules does not apply to joint accounts. If you hold money jointly with a client, interest earned on the account will be for the benefit of the client unless otherwise agreed. If money is held jointly with another practice, the allocation of interest earned will depend on the agreement reached.
Failure to pay interest
A client, including one of joint clients, or a person funding all or part of your fees, may complain to the Legal Ombudsman if he or she believes that interest was due and has not been paid, or that the amount paid was insufficient. It is advisable for the client (or other person) to try to resolve the matter with you before approaching the Legal Ombudsman.
Role of the reporting accountant
Paragraph 2.8 of the Guidelines for accounting procedures and systems at Appendix 3 states the need for policies and systems in relation to the payment of interest.
The reporting accountant does not check for compliance with the interest provisions but has a duty under rule 40 to report any substantial departures from the Guidelines discovered whilst carrying out work in preparation of the accountant's report. The accountant is not, however, required to determine the adequacy of a firm's interest policy (see rule 41.1(d)).
The interest paid must be a fair and reasonable sum calculated over the whole period for which the money is held.
You will usually account to the client for interest at the conclusion of the client's matter, but might in some cases consider it appropriate to account to the client at intervals throughout.
The sum paid by way of interest need not necessarily reflect the highest rate of interest obtainable but it is unlikely to be appropriate to look only at the lowest rate of interest obtainable. A firm's policy on the calculation of interest will need to take into account factors such as:
the amount held;
the length of time for which cleared funds were held;
the need for instant access to the funds;
the rate of interest payable on the amount held in an instant access account at the bank or building society where the client account is kept;
the practice of the bank or building society where the client account is kept in relation to how often interest is compounded.
A firm needs to have regard to the effect of the overall banking arrangements negotiated between it and the bank, on interest rates payable on individual balances. A fair sum of interest is unlikely to be achieved by applying interest rates which are set at an artificially low level to reflect, for example, more favourable terms in relation to the firm's office account.
A firm might decide to apply a fixed rate of interest by reference, for example, to the base rate. In setting that rate, the firm would need to consider (and regularly review) the level of interest it actually receives on its client accounts, but also take into account its overall banking arrangements so far as they affect the rates received.
When looking at the period over which interest must be calculated, it will usually be unnecessary to check on actual clearance dates. When money is received by cheque and paid out by cheque, the normal clearance periods will usually cancel each other out, so that it will be satisfactory to look at the period between the dates when the incoming cheque is banked and the outgoing cheque is drawn.
Different considerations apply when payments in and out are not both made by cheque. So, for example, the relevant periods would normally be:
from the date when you receive incoming money in cash until the date when the outgoing cheque is sent;
from the date when an incoming telegraphic transfer begins to earn interest until the date when the outgoing cheque is sent;
from the date when an incoming cheque or banker's draft is or would normally be cleared until the date when the outgoing telegraphic transfer is made or banker's draft is obtained.
Rule 13.8 requires that money held in a client account must be immediately available, even at the sacrifice of interest, unless the client otherwise instructs, or the circumstances clearly indicate otherwise. The need for access can be taken into account in assessing the appropriate rate for calculating interest to be paid.
For failure to pay a sufficient sum by way of interest, see guidance note (vi)(a) to rule 22.
When you hold money as stakeholder, you must pay interest on the basis set out in rule 22 to the person to whom the stake is paid, unless the parties have contracted out of this provision (see rule 25.3).
In appropriate circumstances you and your client may by a written agreement come to a different arrangement as to the matters dealt with in rule 22 (payment of interest).
must act fairly towards your clients when entering into an agreement to depart from the interest provisions, including providing sufficient information at the outset to enable them to give informed consent.
When acting as stakeholder you may, by a written agreement with your own client and the other party to the transaction, come to a different arrangement as to the matters dealt with in rule 22.
Whether it is appropriate to contract out depends on all the circumstances, for example, the size of the sum involved or the nature, status or bargaining position of the client. It might, for instance, be appropriate to contract out by standard terms of business if the client is a substantial commercial entity and the interest involved is modest in relation to the size of the transaction. The larger the sum of interest involved, the more there would be an onus on you to show that a client who had accepted a contracting out provision was properly informed and had been treated fairly.
Contracting out which on the face of it appears to be against the client's interests is permissible where the client has given informed consent. For example, some clients may wish to contract out for reasons related to their tax position or to comply with their religious beliefs.
A firm which decides not to receive or pay interest, due to the religious beliefs of its principals, will need to ensure that clients are informed at the outset, so that they can choose to instruct another firm if the lack of interest is an issue for them.
Another example of contracting out is when the client stipulates, and the firm agrees, that all interest earned should be paid to the client despite the terms of the firm's interest policy.
In principle, you are entitled to make a reasonable charge to the client for acting as stakeholder in the client's matter.
Alternatively, it may be appropriate to include a special provision in the contract that you retain the interest on the deposit to cover your charges for acting as stakeholder. This is only acceptable if it will provide a fair and reasonable payment for the work and risk involved in holding a stake. The contract could stipulate a maximum charge, with any interest earned above that figure being paid to the recipient of the stake.
Any right to charge the client, or to stipulate for a charge which may fall on the client, would be excluded by, for instance, a prior agreement with the client for a fixed fee for the client's matter, or for an estimated fee which cannot be varied upwards in the absence of special circumstances. It is therefore not normal practice for a stakeholder in conveyancing transactions to receive a separate payment for holding the stake.
A stakeholder who seeks an agreement to exclude the operation of rule 24 should be particularly careful not to take unfair advantage either of the client, or of the other party if unrepresented.