Interest Flashcards
What ethical obligations do solicitors have regarding client funds?
: Solicitors must act with integrity and in the best interests of their clients, according to SRA Principles 5 and 7.
This means they must properly account for any financial benefits from client instructions, unless the client agrees otherwise.
Specifically, Rule 7.1 of the SRA Accounts Rules requires solicitors to account to clients for a fair sum of interest earned on client money held on their behalf.
Does the client always have to receive interest on their funds held by the solicitor?
Not necessarily. While Rule 7.1 establishes the obligation to pay interest, Rule 7.2 allows for a different arrangement if agreed upon in writing with the client. This agreement must provide the client with sufficient information for informed consent.
Additionally, a firm’s policy may state that interest will not be paid if it falls below a certain threshold, which must be reasonable and may differ depending on the type of clientele (e.g., individuals vs. corporate clients)
What are the two methods for dealing with interest on client money?
Solicitors can choose between two methods:
● Separate Designated Deposit Bank Account: A separate account is opened for a particular client, and all interest earned by the bank is passed on to the client.
● General Client Bank Account: The firm decides whether to allow interest based on its policy and calculates a fair sum to be paid from the business account.
What are the advantages and disadvantages of using a separate designated deposit bank account?
Advantages:
● The bank calculates and pays the interest directly to the client.
● It simplifies accounting for interest, especially when dealing with substantial amounts held for a significant time.
Disadvantages:
● Administrative inconvenience of managing numerous accounts for different clients.
● The firm loses the opportunity to benefit from potential interest earned beyond the ‘fair sum’ paid to the client.
How can a firm benefit from interest earned on client money in the general client bank account?
Solicitors are permitted to place client money from the general client account into a general deposit bank account.
By strategically managing funds and ensuring sufficient liquidity for day-to-day client payments, the firm can earn more interest on the deposit account than it pays out to individual clients, thus generating additional income.
What are the key accounting entries involved in paying interest from the general client bank account?
The interest payment is treated as a business expense and recorded on an ‘Interest Payable’ ledger account.
The double entries typically involve:
● Debit: Interest Payable ledger account (Business section)
● Credit: Client ledger account (Business section)
A firm received £200,000 from a client and deposited it into a separate designated deposit bank account. The bank reports £100 interest earned. How should the firm handle this interest?
The firm should record the £100 interest on the deposit section of the client’s ledger account.
This accurately reflects that the interest belongs to the client and is held on their behalf. The firm should then instruct the bank to transfer the interest to the client’s account.
Why might a firm choose to transfer client money from the general client account to a separate designated deposit bank account?
This is typically done when the firm anticipates holding a substantial sum for a client over a longer period.
By using a separate designated account, the firm simplifies the process of accounting for interest, as the bank automatically calculates and pays the interest to the client.
