How can accountants help solicitors manage client interest?

Solicitors who hold money on behalf of clients must comply with strict rules set out in the SRA Accounts Rules. One of these obligations is to pay clients a fair amount of interest on their funds, unless the amount involved is so small that it would be disproportionate to calculate.

Although it may sound straightforward, managing client interest involves complex calculations, careful record keeping, and sound financial controls. This is where accountants play an essential role in supporting solicitors and compliance officers.

Understanding client interest under the SRA Accounts Rules

The SRA requires that clients are treated fairly in relation to any interest earned on money held in the firm’s client account. Solicitors must have a clear written policy explaining when and how interest will be paid, and they must apply this policy consistently.

Interest must be paid where it is fair and reasonable to do so, considering factors such as:

• The amount of money held.

• The length of time the funds are held.

• The type of account where the funds are stored.

If the solicitor holds the funds in a pooled client account, they must calculate interest based on the overall balance and apportion it fairly between clients. For designated deposit accounts opened specifically for one client, the interest earned must be paid to that client in full.

This structure requires accurate systems for calculating interest, reconciling balances, and documenting payments tasks that accountants are ideally equipped to manage.

How accountants assist with client interest management

Accountants support solicitors in several key ways when it comes to managing client interest:

1. Designing compliant systems and policies

Accountants can help law firms design and document a client interest policy that meets SRA requirements. They ensure the policy is practical, fair, and aligned with current interest rates.

For example, they might advise on thresholds for “de minimis” amounts (where interest is too small to justify calculating) or help set procedures for when interest is credited or paid out.

Having a clear, accountant-approved policy helps the firm demonstrate compliance if the SRA audits its financial procedures.

2. Automating and calculating interest

Modern accounting software can calculate client interest automatically, but only if it is set up correctly. Accountants help configure these systems to apply the right rates and timeframes.

They also verify that calculations are accurate, especially where funds are held across multiple client accounts or where rates change over time. This reduces the risk of overpaying or underpaying clients.

For example, if a client’s funds were held for 90 days in a pooled account, an accountant can calculate the daily rate and total interest due based on the balance and applicable rate, ensuring the result is fair and compliant.

3. Reconciling client accounts

Accountants perform regular reconciliations of client and office accounts to ensure that funds are correctly allocated and interest payments are recorded.

During these reviews, they verify that:

• Client money is fully covered by available bank balances.

• Interest calculations match recorded figures.

• Any outstanding interest payments are processed promptly.

Accurate reconciliations not only protect client money but also demonstrate that the firm’s COFA and partners are fulfilling their regulatory responsibilities.

4. Monitoring and reporting compliance

The SRA expects firms to maintain ongoing oversight of their financial management. Accountants can produce periodic reports summarising interest paid, outstanding balances, and compliance risks.

They can also help the COFA identify and log breaches of the SRA Accounts Rules where errors occur, such as late interest payments or incorrect calculations.

Regular monitoring by an accountant provides an independent check that strengthens the firm’s overall governance.

5. Supporting annual SRA accountant’s reports

Most law firms are required to have their client accounts reviewed annually by a reporting accountant. As part of this process, the accountant checks whether client interest has been handled correctly.

They assess:

• Whether the firm’s policy complies with the SRA Accounts Rules.

• Whether interest calculations are fair and consistently applied.

• Whether client ledger balances and reconciliations are accurate.

If the accountant identifies weaknesses, they provide recommendations for improvement, helping the firm stay compliant and avoid qualified reports to the SRA.

6. Advising on tax treatment of client interest

Although client interest is paid to clients, solicitors must still understand the associated tax implications. Accountants advise on how to record and report interest payments correctly, ensuring that both the firm and its clients meet their obligations to HMRC.

They also ensure that any bank interest earned by the firm on pooled accounts is excluded from the firm’s own taxable income if it belongs to clients.

Why accurate client interest management matters

Failure to manage client interest properly can lead to regulatory breaches, financial penalties, and reputational damage. The SRA expects law firms to demonstrate integrity and transparency in handling client money at all times.

Accountants help prevent these issues by providing independent oversight and implementing robust financial systems. They ensure:

• Client money is always protected.

• Interest payments are calculated fairly and efficiently.

• Records are accurate and compliant with audit requirements.

A well-managed client interest process also strengthens client trust and reinforces the firm’s professional standing.

Example in practice

Consider a conveyancing firm that regularly holds large sums of client money during property transactions. The firm’s accountant designs a simple formula for calculating daily interest and integrates it into the firm’s legal accounting software.

Each month, the accountant reviews client balances, ensures interest has been correctly applied, and provides a summary to the COFA. When the SRA accountant’s report is due, all records are already reconciled and in order.

This process not only ensures compliance but also saves time, reduces stress, and avoids costly mistakes.

When solicitors should seek accounting support

Accountants are most valuable to solicitors who:

• Hold significant client balances for extended periods.

• Manage multiple client accounts.

• Have complex interest allocation processes.

• Need to update their client interest policy or software.

Even small practices can benefit from periodic reviews to confirm that their procedures align with the latest SRA guidance and interest rate changes.

Conclusion

Accountants play a vital role in helping solicitors manage client interest fairly, accurately, and in full compliance with the SRA Accounts Rules. From creating compliant policies and automating calculations to performing reconciliations and preparing reports, their expertise reduces risk and strengthens financial governance.

By working closely with accountants, solicitors can ensure their firms handle client money responsibly, maintain regulatory compliance, and build lasting trust with clients.