Interest Payments

Introduction

Solicitors frequently hold client money for substantial periods. Where they do, the **SRA Accounts Rules 2019** require a firm to account to the client for **'a fair sum'** of interest on the money held on the client's behalf (**Rule 7.1**). This chapter explains **when** interest must be paid, **how** a fair sum is calculated under the two methods of holding client money (**separate designated client accounts** and **general (pooled) client accounts**), and the **double-entry accounting entries** used to record interest earned and interest paid. It also covers when a firm may, by **written agreement**, come to a **different arrangement** with the client (**Rule 7.2**), and the role of a firm's **interest policy** and any **de minimis threshold**.

Assessment focus

For the SQE1 FLK2 assessment, you must be able to **apply** the SRA Accounts Rules on interest to realistic client scenarios. Expect single best answer questions (SBAQs) that test: (i) **whether** a fair sum of interest is payable, and the effect of a valid written agreement or a firm's **de minimis** threshold; (ii) **which client money method** is in use (designated v general account) and the consequences for who keeps surplus interest; and (iii) the **correct double-entry bookkeeping** — distinguishing the **business (office) side** from the **client side** of each ledger, and identifying the correct DR/CR entries for interest received from the bank and interest paid to the client. This is a closed-book assessment — you must recall **Rule 7.1**, **Rule 7.2** and the entry patterns from memory and select the single best answer.

Study tips

1) Memorise **Rule 7.1**: account to clients for a **'fair sum'** of interest on client money — and **Rule 7.2**: you may agree a **different arrangement in writing**, provided you give **sufficient information for informed consent**. 2) Interest earned on a **general (pooled) client account is the firm's money** (business money); the firm pays the client only the **fair sum** and may keep the surplus (**s.33 Solicitors Act 1974**). 3) Interest on a **separate designated client account belongs to that client** and is paid straight into that client's designated account. 4) Learn the **entry patterns**: interest **received** from the bank → DR business cash / CR interest received (office); interest **paid** to client → DR interest paid / CR business cash, then CR client ledger / DR client cash. 5) Where the client **owes** the firm money, a fair sum of interest can be applied by **reducing the client's debt on the office side** (DR interest paid; CR client ledger office account). 6) A firm may set a **de minimis threshold** in its interest policy: below it, **no sum in lieu of interest** is payable and **no entries** are required — provided the policy was explained and the client agreed.