Technical Corner: Negative interest rates may be on the horizon
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This month’s technical corner article comes from Robert Blech, SRA Sector Specialist Director, MHA Macintyre Hudson
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Negative interest rates may be on the horizon
Negative interest rates are an issue that a number of years ago no one would have imagined would become a reality. However, in 2014, the European Central Bank introduced negative interest rates in order to try to stimulate economic growth following the global financial crisis of 2008.
If major banks in the UK implement negative interest rates, law firms will need to think about the potential costs and accounting implications of holding client funds.
Negative interest rates will result in banks and financial institutions charging for holding funds. There are of course opportunities to seek alternative banking arrangements, such as long-term bonds or other investments, but this isn’t a realistic option for law firms. Under Rule 2.4 of the Solicitor Accounts Rules 2019, client monies must be available “on demand” unless an alternative is agreed in writing for the client for whom that money is held. That may be viable for specific client circumstances, but access to funds is a key principle in the protection of client monies.
Negative interest rates are not mentioned in the SRA Accounts Rules 2019. 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, states “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.”
Allocating a cost for holding money to individual clients is not an easy task and much will depend on whether the software is available that will be able to facilitate such a process. Also how does one determine whether a charge is fair and reflects accurate?
Recently the SRA have provided some guidance on the potential impact of negative interest rates. They state that that although they are monitoring the situation, there is no indication that the Bank of England will set zero or negative interest rates “any time soon”.
They do acknowledge however, that the European Central Bank have applied negative interest rates to deposit facilities “for a number of years” and that some UK banks are now passing that on where customers have a Euro account.
The SRA also highlight that the that the Accounts Rules do not prevent law firms from passing on costs to their clients. As referred to above, Rule 7.2 of the Accounts Rules does allow practices and clients to agree bespoke arrangements in relation to the payment of interest, although this has to be in writing with sufficient information provided to enable the client to give informed consent.
Additionally a key point made by the SRA is: “If you are looking to pass on costs to a client, whether this involves recovery of the direct cost attributed to the client’s funds or a fixed amount, this will be a matter for you to carefully consider and in agreement with your client”. It does seem that a fixed amount can be charged if explicitly agreed.
Finally, the SRA advise that firms may wish to consider whether they could obtain a better rate from another bank/building society or by using a third-party managed account.
There is also the obvious possibility that firms may increase their fees to account for such a cost. It goes without saying that if a charge is passed on, it should be reasonable and proportionate.