Considerations around negative interest rates for SME law firms

Kate Arnott, head of professional services, partner at MHA, says law firms in the UK will need to consider the potential costs and operational challenges of holding client funds, should negative interest rates become a reality.

With significant speculation occurring around the prospect of negative interest rates, the impact such developments would have on law firms has yet to be clarified.

In 2014, following the global financial crisis of 2008, the European Central Bank introduced negative interest rates to stimulate economic growth and, despite lobbying by the Law Society, all major Irish banks now impose negative interest rates on solicitor accounts.

In the current economic climate, law firms in the UK will need to consider the potential costs and operational challenges of holding client funds, should negative interest rates become a reality here as well.

Put simply, negative interest rates mean banks and financial institutions will charge for holding monies. While individuals may therefore seek alternative banking arrangements, such as long-term bonds or other investments, this isn’t a realistic option for law firms holding client funds. Under Rule 2.4 of the Solicitors’ Accounts Rules 2019, client monies must be available “on demand”, unless an alternative is agreed in writing with the client for whom that money is held. That may be viable in specific client circumstances, but access to funds is a key principle in the protection of client monies.

The Solicitors Regulation Authority (SRA) Accounts Rules do not include provisions for negative interest rates. Rule 7.1 states: “You account to clients or third parties for a fair sum of interest on any client money held by you on their behalf.” And Rule 7.2 says: “You may by a written agreement come to a different arrangement with the client or the third party for whom the money is held as to the payment of interest, but you must provide sufficient information to enable them to give informed consent.”

Whatever charge is applied to holding client money, it will be difficult and time-consuming to allocate that cost fairly and proportionately across all clients, unless software is available to automate the process.

The SRA may issue further guidance on Rule 7 to accommodate negative interest rates, which will need to ensure firms are acting in their client’s best interests while being practical about how law firms address the issue.

Potentially, fees could be increased to factor in this charge, or it may be permissible to pass on reasonable charges to clients for holding their money, where expressly stated in the client’s terms and conditions and/or care letter, and clients will need to be given sufficient information to “enable them to give informed consent” before agreeing to such a charge. If this approach is allowable, it will be vital that charges are proportionate to the costs incurred by the firm. It’s unlikely to be an exact science, but the SRA and reporting accountants will need to assess what basis the firm has used to pass on the negative interest rate cost to each client and how this compares to what the bank is charging them.

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