Vale & West Chartered Accountants Blog

Solicitors warned of “likelihood” of negative interest rates

Solicitors have been advised to inform clients about the “likelihood” of negative interest rates and the implications to money held in client accounts.

According to the Institute of Legal Finance & Management (ILFM), bank interest rates could fall into negative territory as a result of the Covid-19 pandemic, meaning banks could charge interest for holding cash.

While this would favour solicitors or conveyancing clients who are seeking to borrow money, negative interest rates could negatively impact solicitors whose clients routinely hold large sums in client bank accounts.

A recent case study, for example, found that a small, local law firm held “a little over half a billion pounds” for a Professional Indemnity Insurance (PII) broker over a period of 12 months. Even a small dip into negative territory, therefore, could significantly harm the solicitor’s financial position.

Commenting on negative rates, Ian Johnson, chair of the IFLM, said: “While this may not be an immediate concern for most law firms; we are still after all trying to navigate our way through a much larger problem at the moment, it is unlikely that banks will sit on the cost of negative sterling rates for quite as long as they did for other currencies, and so forward planning now by firms may save us all a headache further down the line.”

To prepare for the possibility of negative interest rates, the IFLM has suggested that solicitors introduce a “more dynamic” interest rates policy where any possible loss is shared or passed on.

Alternatively, law firms could consider the use of Third-Party Managed Accounts (TPMAs), which have recently been approved for use by several regulators.

There is also a question whether the Solicitors Regulation Authority (SRA) will allow solicitors to pass on the cost of holding client account money, after the regulator suggested it was “not in the client’s interest to pick up the cost of the economy”.

The regulator added that it was working in tandem with the Law Society to consider potential solutions should the interest rate fall into negative territory.

For support and advice on related issues, please get in touch with our expert team today.

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