Interest on Client Money
Solicitors Accounts > Interest on Client Money
If you apply the old 2011 Accounts Rules thresholds (£500 held for 14 days, etc.), you will get the question wrong. The 2019 SRA Accounts Rules use a principle-based "fair sum" approach, and examiners test this shift because many candidates still use outdated rules.
What Is Interest on Client Money in SQE1?
Interest on Client Money covers the mandatory requirement to pay fair interest to clients on money held in the client account (Rule 7.1). This topic requires you to understand the shift from the old prescriptive 2011 Rules (which had specific thresholds) to the current 2019 principle-based approach. Under Rule 7.1, the firm must pay a fair sum of interest on client money held unless the firm and client have agreed otherwise IN WRITING. Fair sum means considering the amount held, period held, and prevailing interest rates—there is no specific formula or threshold. You need to distinguish between separate designated accounts (interest earned is attributable directly to that client) and general pooled accounts (firm must calculate what a fair sum would be). For SQE1, the main trap is using outdated rules; candidates who apply the old thresholds will fail.
Key Principles for SQE1
- Fair sum rule (Rule 7.1): Firm must pay a fair sum of interest to the client on client money held, unless firm and client agree otherwise IN WRITING. There is no specific threshold or formula.
- Fair sum factors: Consider the amount held, the period held, and prevailing interest rates. Larger sums held longer at higher rates = higher fair sum expected.
- Written agreement to vary: Firm and client can agree in writing to exclude interest, apply a specific rate, or set thresholds (e.g., no interest below £500). The agreement must be in writing.
- Separate designated accounts: Interest earned on a separate designated account belongs to that client directly; firm must account to client for that interest.
- General pooled accounts: Interest earned on the pooled account accrues to the bank account as a whole. Firm must still calculate and pay a fair sum to clients based on what their money would have earned if held separately.
Exam tip
The 2019 SRA Accounts Rules use a principle-based 'fair sum' approach, NOT the old 2011 prescriptive thresholds. Rule 7.1: the firm must pay a fair sum of interest to the client on client money held unless the firm and client have agreed otherwise IN WRITING. Fair sum means considering amount held, period held, and prevailing interest rates — no specific formula. For separate designated accounts, interest accrues directly to the client. For general pooled accounts, the firm must calculate what a fair sum would be. The written agreement can exclude interest, but only if documented in writing.
How This Appears in SQE1 Questions
SQE1 questions may present a scenario where client money has been held for a significant period and ask whether the firm must pay interest and how much. The trap is applying the old 2011 rules (which had specific thresholds) rather than the current 2019 principle-based approach. Questions may also test whether the firm and client can agree to exclude interest - they can, but only in writing.
Quick Example Scenario
A firm holds £80,000 in its general client account for a client for three months while a property transaction is delayed. The firm's terms of business state that interest will be paid on sums exceeding £10,000 held for more than 14 days. The firm does not pay any interest. The firm should pay a fair sum of interest to the client. The amount is substantial and the holding period is significant. If the terms of business contain a valid written agreement on interest, the firm should apply it. If not, the firm must assess what a fair sum would be having regard to the circumstances. Failing to pay any interest in these circumstances risks a breach of Rule 7.1.
Common Mistakes Students Make
- Applying the old 2011 Accounts Rules thresholds - the 2019 Rules use a principle-based 'fair sum' approach.
- Assuming interest never needs to be paid on pooled general client accounts - it does; the firm must calculate a fair sum.
- Forgetting that the firm and client can agree in writing to vary the interest arrangement.
- Not distinguishing between separate designated accounts (interest earned directly by the client) and general client accounts (firm must calculate and pay a fair sum).
Quick Summary
- Rule 7.1: firm must pay fair sum of interest on client money held in client account, unless firm and client agree otherwise in writing
- Fair sum: Rules do not prescribe specific rate or formula; firm must assess fair sum having regard to all circumstances (amount, period held, prevailing interest rates)
- Agreement to vary: firm and client can agree in writing to different arrangement (e.g., no interest below threshold, or specific rate applies)
- Separate designated account: interest earned on separate designated account belongs to that client; firm must account to client for that interest
- General pooled account: interest earned on pooled account accrues to bank account as whole; firm must still ensure client receives fair sum (typically calculated by reference to what money would have earned if held separately)
- De minimis: no specific threshold, but firms may include provisions in terms of business (e.g., no interest on amounts below £500 held for less than two weeks)
- Interest must be paid promptly once matter concludes or money is returned
- Old 2011 Rules thresholds no longer apply - the 2019 Rules use principle-based 'fair sum' approach
- Applies whether money held in general client account or separate designated account
Want to test this now? Try a few SQE1-style questions below before moving on.
Test Yourself
Test yourself
Quick check questions based on this article.
Question 1
Scenario
A solicitor acts for a client in a probate matter. The estate includes a property that is to be sold. The solicitor receives the net sale proceeds of £320,000, which are deposited into the firm's general client account. The solicitor anticipates that it will take approximately four months to complete the administration of the estate and distribute the proceeds to the beneficiaries. The solicitor considers placing the funds in a separate designated deposit account but decides against it because the firm is in the process of changing banks. The solicitor's supervising partner approves this decision. The firm's general client account earns a negligible rate of interest. After four months, the solicitor prepares to distribute the estate. The beneficiaries ask whether any interest has been earned on the proceeds during the administration period. The solicitor calculates that the general account earned approximately £30 in interest, whereas a designated deposit account would have earned approximately £1,800. The client file also contains a note about the deceased's preference for a particular funeral director.
What sum of interest, if any, must the solicitor account for to the beneficiaries?
Question 2
Scenario
A solicitor acts for a client in a complex trust matter. The client transfers £180,000 to the firm's client account. The solicitor anticipates that the matter will take approximately nine months to resolve and that the funds will need to be available for periodic disbursements throughout. The solicitor considers placing the funds in a designated deposit account but is concerned that the notice period for withdrawals from such accounts could delay urgent disbursement payments. The firm's general client account allows immediate access but earns very low interest. The solicitor discusses the matter with the firm's compliance officer, who suggests a compromise: placing £130,000 in a designated deposit account with a 30-day notice period and keeping £50,000 in the general client account for immediate access. The solicitor agrees and implements this arrangement. After nine months, the matter concludes. The designated account earned £1,200 in interest and the general account earned £25 in interest. The solicitor needs to determine how to account for the interest. The solicitor also notes that the client recently changed solicitors for a separate employment matter.
How should the solicitor account for the interest earned across both accounts?
Question 3
Scenario
A newly qualified solicitor is reviewing the firm's procedures for paying interest on client money. The solicitor reads the firm's written interest policy, which provides that the firm will pay interest based on the following factors: the amount of money held, the period for which it is held, and the interest rate applicable. The solicitor is handling a matter where £70,000 of client money has been held for two months in the firm's general client account. The firm's policy also states that the firm will not pay interest where the amount calculated would be less than £20. The solicitor calculates that the interest earned at the general account rate is approximately £70. The solicitor wonders whether the firm's policy is compliant with the SRA Accounts Rules. The solicitor also notes that the client sent a birthday card to the firm's receptionist. The firm's compliance officer confirms that the policy was last reviewed 18 months ago and is considered to represent a fair approach to the payment of interest.
Is the firm's written interest policy compliant with the SRA Accounts Rules?
Practice with full exam-style questions
Related Topics
- SQE1 Solicitors Accounts: Complete Guide
- Client Money and Client Accounts
- Special Client Account Arrangements
Practise Interest on Client Money Questions for SQE1
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