The Solicitors Regulation Authority recently confirmed, that effective from 25th November 2019 the new rules will come into effect. These reforms are intended to simplify Accounts Rules and offer clear guidance for controlling client money ensuring client funds are protected and used for the purposes intended.
The responsibility to manage funds does present a challenge especially when updated regulations via the Common Reporting Standards (CRS) & Foreign Account Tax Compliance Act (FATCA) has meant banks require increased information to operate traditional designated client accounts. The increased administrative burden has encouraged many firms to seek alternative methods of managing client funds supported by the implementation of Outcomes Focussed Regulation (OFR) launched in October 2011, which acts as an enabler for firms to control client funds in accordance with their own preference.
Guidance to this effect is the new rule 2.4:
You ensure that client money is available on demand unless you agree an alternative arrangement in writing with the client, or the third party for whom the money is held
The new rule offers a subtle change from the exiting rule (13.8) which states funds must be immediately available even at the sacrifice of interest. The shift from ‘immediately’ to ‘on demand’ is subtle and in reality, I expect firms will operate funds in the same way as they do now, namely by ensuring the funds are available to service client needs as and when required. To ensure this flexibility funds should be kept instantly accessible (on demand) via a Designated Account or a pooled General Client Account.
The alternative is a term deposit where the above rule (2.4) would suggest firms can seek to maximise interest by placing funds on a fixed term i.e. 12 months. This type of account usually means the funds cannot be accessed during the term period therefore the firm is unable to access funds.
Solicitor deposits are an important source of liquidity for banks and this is why you see banks offering variations of client accounts aimed at gathering ‘sticky deposits’. To a banker this is known as top slicing where a safe level of client balances (typically 60% of the lowest account balance over a 12 month period) is made available to be placed long term in a separate general client account which offers an enhanced interest rate. So long as these funds are ‘on demand’ or available upon request then the firm will always meet their payment obligations and while funds do remain on deposit they will generate an additional income. There are a number of variations of this type of account but all essentially allow funds to be accessed on demand with varying terms and conditions.
One thing to keep in mind, as firms are controlling other people’s money, is consideration must always be given to the financial strength of the bank used to deposit client funds. It would be reputational suicide for a firm to place client funds with a bank purely for the firm’s own gain (not sharing the enhanced interest with the client) and for that bank to have a liquidity issue causing an issue to meet the firm’s payment obligations.
Due to this complexity firms should seek trusted independent advice which is readily available from trusted sources such as the Institute of Legal Finance and Management (ILFM)