LPC Solicitors’ Accounts

Recording: Interest and Statements of

account

Solicitors’ accounts recording: Interest and Statements of

account for clients

1 Introduction
In this recording we look at when a firm of solicitors may be required to account to a
client for interest, along with how the ledger entries for such payments would work.
Finally, we will finish the recording by looking at statements of account.

You should also refer to the relevant Solicitors Accounts Rules which are mentioned in
this handout.

2 Interest
Paragraph 1.2 of the SRA Code of Conduct for Solicitors requires; ‘You do not abuse your
position by taking unfair advantage of clients or others’. Paragraph 4.1 of the Code
requires; ‘You properly account to clients for any financial benefit you receive as a result
of their instructions, except where they have agreed otherwise’. We can see from these
general principles why it would be wrong for a firm to earn interest on its client bank
account, without accounting for the benefits to clients (or, at least, agreeing with the
client otherwise - note rule 7.2 of Solicitors Accounts Rules (SARs) which allows a firm to
agree with a client not to account for interest in certain circumstances explored in more
detail below).

Rule 7.1 of SARs requires that ‘you account to clients (or to third parties) for a fair sum of
interest on any client money held by you on their behalf…’. The SARs do not stipulate
when interest is to be paid or how it should be calculated. This is for the individual firms
to decide. The terms of a firm’s interest policy should be drawn to the attention of the
client at the start of the retainer.

Please also review rule 7.2 which confirms “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”. This indicates that a firm could come to an agreement with a
client, in writing, for the firm to keep any interest earned – however, they would need to
ensure that they gave the client sufficient information to get their client’s fully informed
consent to do this.

Generally, note that:

1. The firm must make sure it includes its (written) interest policy in the initial client
care pack.

2. If money is being held as a stakeholder then generally interest accrues to the person
to whom the stake is paid.

3. A client can complain to the Legal Ombudsman if in dispute about:

 the necessity for the firm to pay interest in a given case; or

 the amount.

4. A good amount of the money held on client account from time to time is much too
transient for there to be any liability for the firm to pay interest to the individual

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 LPC Solicitors’ Accounts
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clients to whom it belongs. This large sum of money earns deposit interest and it
accrues to the firm.

5. For the purpose of this module you are expected to know the general circumstances
in which interest would fall due and the accounting mechanisms for making the
necessary postings. You will not be required to make the decision of principle as to
whether to pay interest when writing up the accounts in a particular question. If we
want you to pay interest we will tell you to do so and also tell you the amount
payable.

2.1 Mechanisms for paying interest on clients’ money

2.1.1 By Separate Designated Client Account/Designated Deposit Bank Account

If a large amount of money is received or if the solicitor knows that they will be holding a
lesser sum for some time, the practice may place the fund in a Designated Deposit Bank
Account (also called, under an older version of the rules, “separate designated client
accounts”), that is, a separate bank account just for that client. (If funds are placed in a
Designated Deposit Bank Account, the payment of interest is simple; the client merely
receives the interest which has accrued to the capital sum while it has been on deposit).
The Designated Deposit Bank Account method involves two separate transfers one
moving the money from the ledger account to a separate designated deposit bank
account and the other moving the cash from the main cash sheet to a separate
designated deposit cash sheet. In practice placing money in this type of separate bank
account is usually in relation to probate matters. Some firms virtually never use them. As
it rarely happens you will not be required to produce a Designated Deposit Bank Account
so we will not be considering it in detail.

2.1.2 By Interest Payable Account

The solicitor does not have to place client’s money on a separate designated client
account if they do not wish to. As an alternative, the practice may merely pay “a fair
sum of interest on any client money held” in accordance with rule 7.1. It may also be
referred to as “a sum in lieu of interest” and is often calculated by looking at the amount
of interest that would have been earnt if the money had held in a separate account.

In such a case, the practice has to pay the interest from its Interest Payable Account. You
might be querying how much that costs the firm. In fact, this expense is more than offset
by the interest which is earned by the practice on the large amount of clients’ money held
from time to time on which no interest would reasonably be payable to clients.

We will consider the Interest Payable method.

Example

A firm acts for the executors of Brown’s estate in relation to a probate matter. There has
been £7000 held on the client account for this probate matter for a month. On 23 March
the firm decides it is appropriate to account to the client for £41 in interest. The capital
sum had not been put in a Separate Designated Client Account.

Interest Payable Business Remember – credits on

business side of the client
Date Particulars Dr Cr Bal ledger are trouble so make
Mar 23 Exc. Brown - 41 sure to correct this quickly
probate/in lieu of
int.
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Client: Exc. Brown - probate Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Feb 23 Cash/you 7,000 7,000
Mar 23 Int. payable/in lieu 41 41CR
of int.
Mar 23 Cash/transfer of int. 41 - 41 7,041

Cash Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Feb 23 Exc. Brown - 7,000
probate/you
Mar 23 Exc. Brown - 41 41
probate/transfer of
int.

To keep the note simple we have not shown the eventual payment to Brown of the whole
£7,041.

Note: As an alternative to transfer the £41 from business to client, the firm could decide
to pay the £41 to the client directly from the business account.

3 Statements of account
Statements of Account are an exercise in clear and logical thinking. They often elude
trainee (and newly qualified) solicitors. You will have to complete a statement of
account as part of the assessment.

In the remainder of this recording we will work through an example of how to prepare a
statement of account for a client in a property transaction (you may also see them
referred to by other names, such as a financial statement). In addition to being part of
the assessment, we think it is important that students learn how to prepare statements
of account as:
1. it is a skill which is transferable to a range of areas of practice; and
2. it helps you understand how a solicitor knows how much money they either:
a. need to obtain from a client in order to complete; or
b. need to return to a client at the end of a matter.

Those involving property matters are the most complicated and they are the ones on
which we shall concentrate. The most important thing to decide early on is whether:

the client will have to pay the firm money (in order for completion to take place)

OR

the firm will have to pay the client money (from the change left over at the end).

The start point of the statement of account depends on which of these outcomes is to be
reached. This is in fact highly realistic. You only produce a statement of account on a
matter when you have to. If you do so during the currency of the matter it is because

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you need funds in order to proceed. If you produce it at the end it is normally because
you are repaying the client the money which is left over at the end of the matter.

The sanction if you get a statement wrong is also highly realistic, especially in the first
type of statement. If you make a mistake and ask the client for too little money, you will
have difficulty in paying the disbursements required post-completion. It would be
embarrassing to have to go to the client asking for further sums of money. In the
converse situation, if you request too much money from the client they likely will find this
extremely frustrating (to say the least) as you have made them provide you with money
(which they may have struggled to obtain) which you never actually needed.

3.1 Cases where the solicitor requires the client to put the firm in funds
before completion

These statements of account will commence with ‘purchase of’. There will then be
deductions of the monies arising from the sale leading to a sum required from the client.

If we presume we are acting for the following client in relation to their sale and purchase.
The purchase is being part funded by a mortgage from Central Bank and there is a
mortgage to redeem in relation to the property being sold.

Client: J E Jefferson
Matters: Purchase of The Chestnuts and
Sale of 14 Rimmington Road.

Purchase of The Chestnuts 240,000

Add LLC1 fees 121
Land Registry fees 212
Survey fee (include VAT) 720
Our costs on purchase as per attached note 960 2,013
242,013
Less Central Bank advance 110,000
Net cost of purchase 132,013

Sale of 14 Rimmington Road 150,000

Less Estate Agents (include VAT) 1,440
Our costs on sale as per attached note 432
Redemption of charge to Abbey National 47,500 49,372
Net proceeds of sale 100,628
31,385
Less paid by you on account 31 March 24,000

Required from you £7,385

3.2 Cases where the matter is completed and there is money left over to be
provided to the client

These Statements of Account will commence with ‘sale of’. By using the same example
but varying the figures a little so that the client is has a smaller mortgage to redeem, we
reach the point where there will be change left over. In that case the statement is
completely re-ordered:

Client: J E Jefferson
Matters: Purchase of The Chestnuts and
Sale of 14 Rimmington Road.
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Sale of 14 Rimmington Road 150,000

Less Estate Agents (include VAT) 1,440
Our costs on sale as per attached note 432
Redemption of charge to Abbey National 15,500 17,372
Net proceeds of sale 132,628

Purchase of The Chestnuts 240,000

Add LLC1 fees 121
Land Registry fees 212
Survey fee (include VAT) 720
Our costs on purchase as per attached note 960 2,013
242,013
Less Central Bank advance 110,000
Net cost of purchase 132,013
Due to you £615

3.3 Miscellaneous points on statements

1. Where the client has paid the solicitor money during the currency of the matter
(often to put the solicitor in funds for an exchange of contracts) it is best to
deduct that at the end of the statement.

2. Probate statements are usually easier. Here you merely add together all the
assets collected and then deduct all the various expenses. The balance is divided
up between the various beneficiaries.

3. How to tackle these if we ask you a question (and we will…). Once you have
decided whether you will need to generate the account during the transaction
(and assuming for these purposes that it is the first type) it is best to work
through all the entries described in the transaction recording in the statement
those which apply to the purchase and then those that relate to the sale. Unless
the client has provided funds in any way during the transaction (e.g. by providing
the solicitor with money to help with a deposit), ignore the deposits which are
paid by solicitors at exchange; these will ‘come out in the wash’. Similarly
bridging finance which is repaid during the currency of the transaction can be
ignored except for any interest which the bank may charge. This can be shown as
an expense of either the purchase or the sale; it does not matter which.

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