The UK may be facing a recession fueled by rising inflation. Everywhere we turn the cost of doing business is increasing. The price of fuel, utilities, staff salaries and the increased cost of bank borrowings mean profits are under pressure. Law firms are therefore eager to explore options to earn additional income.
Earning interest from client monies was once considered a ‘silent fee earner’ where income derived from credit interest rates once offered a significant boost to law firms.
Your cashier as your highest fee earner?
Many law firm leaders will remember the period of higher interest rates at the turn of the century when the official bank rate stood at 6%.
Banks typically paid as much as 5% on client monies, so it is easy to see why interest earned from client money could be so valuable.
Since then, the decline in interest rates saw the interest on client monies at historic lows. Even though the Bank of England has increased the bank rate five times in the past few months, advertised rates offered by the big four high street banks pays a paltry 0.10% AER or less. That means, a firm earns c£1k for every £1m held on deposit.
“According to latest Law Society LMS Benchmarking Survey (2022), the average fee earner bills £134k with a breakeven point of £121k.”
That means a ‘profit’ of £13k for an entire year’s work.
Putting it another way, using rates offered by the major high street banks, a firm would need to hold £13m on deposit for 12 months to surpass the profit level of the average fee earner.
A growing opportunity
Thankfully a small number of banks/building societies have developed their offering to the legal sector. With rates as much as ten to fifteen times higher than standard advertised rates, and a service offering that will delight customer expectations, it is encouraging to see a once valued source of income return. As law firms are likely to hold more client funds than they did 22 years ago, they don’t need rates of 5% to surpass the average fee earner profit level.
A more modest deposit of £900k will generate sufficient income to generate more than the average fee earner.
How can I benefit
A practice commonly known as ’top slicing’ enables legal practices to generate considerably more credit interest. An amount (typically up to 50% of the lowest general client account balance recorded during the year) is moved to a bank or building society which is willing to pay more deposit interest than traditional high street banks.
What about compliance
For clarity, the Solicitors Act 1974 Section 32 & 33 and the SRA Accounts Rules do not restrict law firms from holding more than one client account. If the financial institutions and the accounts they operate meet the regulatory requirements, then firms are free to use these providers.
What is the catch?
There is no catch. The high street clearing banks have open access to wholesale markets where they can purchase cash more cheaply. Smaller, non-clearing banks do not have the same access to cheap sources of funding and therefore utilise retail/commercial deposit holders as method of boosting their liquidity.
Is my money safe?
All banks operating in the UK must advise their customers whether funds are protected by the government’s own Financial Services Compensation Scheme (FSCS). What this legislation means is that each depositor (or client of a law firm when considering client monies) is afforded a guaranteed recovery level of £85,000 should a banking institution fail.
Clients of law firms also benefit from FSCS legislation called ‘Temporary High Balances’ which covers depositors up to £1m for the first 6 months funds are received into a client account.
Law firms will also wish to complete their own due diligence checks on the financial strength and the service levels available of a prospective client monies account provider.
Overcoming the barriers
The key barrier is perception. Legal cashiers may consider holding funds in a term deposit as non-compliant with the SRA Accounts Rules; law firm leaders may consider the exercise not worth it.
If placing funds in a term deposit is still an objection, it may interest firms to know that some providers offer client accounts which do not require a 12-month term committment. Interest is even paid monthly to a linked office account meaning the firm can benefit from the additional income immediately.
Regulation allows for multiple client accounts, and at a time where income is threatened there is a real opportunity for law firm leaders to, once again, optimise the income from client monies.
Paul McCluskey is the Managing Director of Gemstone Legal which specialises in helping firms to maximise income and minimise risk. Paul has helped law firms generate additional income from client monies for over 15 years.
If you have any questions or require further details on how you can benefit from improved income on client monies, Paul can be contacted on paul.mccluskey@gemstonelegal.co.uk