Living the Eye Life! – September 2023 – Interesting times ahead for law firms
No summer getaway for the Financial Eye team this year. Too much going on so rather than battling sun worshipers for early morning sunbeds it, has been battling to beat the never-ending round of train strikes! Our clients always ask us how we manage to work around these travel interruptions. The answer of course is with considerable planning. More of this later. And when we are not discussing the perils of public transport, we usually move on to the state of the property market and what impact the steady increase in interest rates might have on those involved in conveyancing. Well there is a wider impact of high interest rates that law firms need to give some additional thought to.
We are “fortunate” to be mature enough to remember the last time when interest rates were at current levels, and indeed much higher. However, the banking market has never been as volatile or twitchy as it is today. Cyber and Money Laundering has really unsettled the world of finance, and that has a direct impact on law firms. Fresh on the heels of the 14th consecutive interest rate rise, we thought it might be useful to run through a few ways law firms can help themselves in these strange new times.
- Have a 2nd banking relationship
This should become every law firm’s number one priority. Banks are currently closing 1,000 accounts a day. Details of the sheer scale of account closures were obtained under a Freedom of Information request made to Financial Conduct authority. That is an incredible 350,000 last year, up from 50,000 in 2016. NatWest hit the press for the rather shoddy treatment of Farage and for trying to pretend it was for commercial reasons. However, NatWest are actually top of the table for account switchers with nearly twice as many as the next placed bank (HSBC if you ask). Now I know this is retail banking, but the high-street retail banks are also the banks that law firms hold their money with, generally.
We are recommending that firms have a second banking relationship so that if the worst should happen, you can get moving and operational in a short space of time. It is happening, so don’t think “it couldn’t happen to us”. It can happen to any law firm, and we came across one last year who had been served with just 60 days-notice that their client account was going to closed. No explanation was provided. It was touch and go trying to set up a new client account with a new bank. Given the current behaviour of banks, I’m not so sure we would have managed to do so in the current climate.
When looking to open a second client account, keep an open mind to new entrant banks. Only one third of the world’s banks (by market capitalisation) are US or European. As long as they can provide a qualifying client account, you should look at the potential benefits. The government has announced plans to change the rules around banak account closures, including a requirement to give longer notice of an impending shutdown. But why take the risk when you act now and establish a second banking arrangement.
- Review your Interest Rates
It may surprise you to hear that your banks do not always have your best interest at heart. We regularly meet firms whose bankers have not proactively reviewed the rates payable to law firms.
- Don’t forget your own Bank Accounts
By the way, many firms we meet have significant office account balances because they are saving funds for VAT, partner tax, Capex projects, or just for partner capital accounts. You should move funds into a separate deposit account which attracts a better rate of interest.
This makes good sense from an interest perspective, but it also moves the money away from a direct cyber-attack. Generally money in a deposit account can only be moved to your current account so the criminals will have to transfer it before they steal it!
- Review your Interest Policy
You are required to have an up-to-date interest policy. Under the Solicitors Accounts Rules you have an obligation to pay interest at a fair and reasonable rate.
What does fair mean in this context? You were never allowed to say, “our policy is that we don’t pay interest because the rates are so low”. That was never considered to be a fair interest policy. You have to consider that the beneficiaries to an estate did not sign up to your terms, so they cannot have agreed to waive interest.
You can, however, have a policy that means you do not pay interest in the vast majority of cases. For example, you can say that the rate is unlikely to be as high as the rate the client may be able to obtain when depositing the money themselves.
We have helped firms to formulate a policy that meets with the requirement to be fair, but also means that they benefit from the current interest rate. Remember, you are not allowed to offer a banking facility. The client should be choosing a law firm for the quality of legal service, not for the interest they might pay on Client balances.
I hope this has given you some interesting insight into the other effects of interest rate rises and how they may impact on COFAs. And by the time are reading this, I’d like to think I have managed to get away for a few days of sunshine and that maybe, just maybe, the train strikes are a thing of the past!
Nigel Wilson
Director – Financial Eye