What Does SRA Rule 7 Say About Client Money Interest?
SRA Rule 7 is one of the most frequently misunderstood parts of the SRA Accounts Rules. It governs when and how a law firm must pay interest to clients on money held in the client account. The rule is not optional. Every SRA-regulated firm must comply, whether it holds client money for a week or a year.
The core requirement is straightforward. A firm must pay a client a "fair sum" of interest on client money held, unless the amount is too small to justify the administrative cost. The rule applies to all client money held in a client account, including money held for conveyancing completions, litigation settlements, or probate administration.
Many solicitors assume that if the client money is held for a short period, no interest is due. That is not correct. The test is not the duration of the holding but whether the amount of interest that would be earned is "fair" to pay given the administrative cost of calculating and paying it. A firm must have a documented policy to determine this.
For a detailed breakdown of the full SRA Accounts Rules, see our SRA Accounts Rules Essentials guide.
When Must You Pay Interest on Client Money?
Interest must be paid to a client when the amount of client money held is significant enough that a fair sum of interest would accrue. The SRA does not specify a minimum threshold. Instead, it expects each firm to set its own de minimis level based on its administrative costs.
Typical practice among UK law firms is to set the de minimis at around £20 to £50 of interest per client per matter. If the interest that would be earned over the period the money is held is below that threshold, the firm may retain the interest. If it exceeds the threshold, the firm must pay the interest to the client.
For example, consider a conveyancing matter where the firm holds £200,000 of client money for 14 days. At a typical client account interest rate of 2% per annum, the interest earned would be approximately £153. That clearly exceeds a £50 de minimis. The firm must pay that £153 to the client. If the firm held £5,000 for 10 days, the interest would be about £2.74. That falls below the de minimis, so the firm may retain it.
The key point is that the firm must calculate the interest that would be earned on the specific amount held for the specific period. You cannot simply decide that all short-term holdings are exempt. Each matter must be assessed individually.
What Is a Fair Interest Policy?
A fair interest policy is a written document that sets out how your firm determines whether to pay interest on client money. It must be applied consistently across all client matters. The SRA expects every firm that holds client money to have such a policy in place.
The policy should include:
- The de minimis threshold (the minimum amount of interest you will pay)
- The interest rate you use to calculate interest (typically the rate your client account actually earns)
- The calculation method (daily or monthly, simple or compound)
- How you will notify clients about the policy (usually in your terms of business)
- How you will record decisions not to pay interest
Your policy must be fair. It cannot be designed to avoid paying interest that is clearly due. The SRA will review your policy during a compliance visit and may challenge it if it appears unreasonable.
For example, setting a de minimis of £500 would likely be considered unfair for most firms, because it would allow the firm to retain significant sums that properly belong to the client. A de minimis of £20 to £50 is more typical and more likely to be accepted by the SRA.
How Do You Calculate Client Money Interest?
The calculation is straightforward in principle but can be time-consuming in practice. You need to know:
- The amount of client money held
- The number of days it was held
- The interest rate payable on the client account
The formula is: (Amount x Interest Rate x Days Held) / 365.
For example, if you hold £50,000 for 30 days at 2.5% per annum, the interest is (£50,000 x 0.025 x 30) / 365 = £102.74. If your de minimis is £50, you must pay this to the client.
Most modern practice management systems can automate this calculation. If your system does not, you may need to calculate manually or use a spreadsheet. The SRA expects you to have a reliable method and to keep records of your calculations.
Interest must be paid promptly after the client money is withdrawn from the client account. You cannot delay payment until the end of the matter. If the money is held for a long period, you may need to make interim interest payments.
What About Client Money Held for Short Periods?
Short-term holdings are not automatically exempt. The test is always whether the interest that would be earned exceeds your de minimis. If it does, you must pay it, even if the money was only held for a few days.
However, the administrative cost of calculating and paying very small amounts of interest can outweigh the benefit to the client. That is why the de minimis exists. The SRA accepts that it is not practical to pay interest of £1 or £2. But you must have a policy that sets a reasonable threshold.
For example, if you hold £100,000 for 5 days at 2%, the interest is £27.40. If your de minimis is £50, you may retain this. If your de minimis is £20, you must pay it. The choice of de minimis is yours, but it must be justifiable.
What Happens If You Do Not Pay Interest When Required?
Failure to pay client money interest when it is due is a breach of the SRA Accounts Rules. The SRA can take regulatory action, including fines, rebukes, or in serious cases, referral to the Solicitors Disciplinary Tribunal. It can also damage your firm's reputation with clients.
In practice, the SRA often discovers non-compliance during routine compliance visits or when a client complains. If you have a documented fair interest policy and can show that you applied it consistently, you are less likely to face action for an isolated error. But a pattern of non-payment will attract scrutiny.
If you identify that you have failed to pay interest that was due, you should pay it promptly to the client and notify the SRA if the breach is material. Your COFA should be involved in this process.
Can a Law Firm Keep Client Money Interest?
Yes, but only where the interest is below your de minimis threshold. The SRA does not require you to pay every penny of interest earned. The rule is about paying a "fair sum", not every last pound.
If the interest is below your de minimis, you may retain it. This is sometimes called "banking the interest" or "retained interest". It is a legitimate source of income for the firm, but it must be properly accounted for. The retained interest should be credited to the firm's office account, not left in the client account.
However, you cannot use a high de minimis to deliberately avoid paying interest that is clearly due. The SRA will look at the overall fairness of your policy. If you retain significant sums that would be material to clients, you are at risk.
For more on COFA responsibilities around client money, see our COFA Compliance Support page.
How Should You Document Your Fair Interest Policy?
Your fair interest policy should be a formal document, approved by the firm's management and reviewed annually. It should be included in your firm's compliance manual or procedures folder. Every fee-earner who handles client money should be aware of it.
The policy should be communicated to clients in your terms of business. You should explain that you will pay interest on client money where it is fair to do so, and that you have a de minimis threshold. This manages client expectations and reduces disputes.
You should also keep records of decisions not to pay interest. If a client queries why no interest was paid, you should be able to show that you considered the matter and applied your policy consistently. A simple note on the file is sufficient.
What About Interest on Client Money Held in a Designated Account?
If you hold client money in a designated client account (a separate account for a specific client or matter), the interest earned on that account belongs to the client. You cannot retain it. The bank will usually pay the interest directly to the client, but if it pays it to the firm, you must pass it on.
Designated accounts are less common than pooled client accounts. Most firms use a pooled client account where all client money is held together and interest is calculated on the average balance. The SRA allows both methods, but the interest rules apply equally.
Common Mistakes in Handling Client Money Interest
Several common mistakes lead to SRA breaches:
- Not having a written fair interest policy at all
- Setting a de minimis that is too high (e.g., £500)
- Failing to calculate interest on short-term holdings
- Not paying interest promptly after client money is withdrawn
- Retaining interest that clearly exceeds the de minimis
- Not notifying clients about the policy in terms of business
- Not recording decisions not to pay interest
If any of these apply to your firm, you should review your procedures immediately. The SRA is increasingly focused on client money compliance, and interest is a common area of concern.
How Does Client Money Interest Affect Your SRA Accountant's Report?
Your SRA accountant's report will include a review of your client money interest procedures. The accountant will check that you have a fair interest policy and that you are applying it consistently. If the accountant finds a breach, they must report it.
If your firm holds less than £10,000 of client money at any time and the average balance does not exceed £250, you may be exempt from the accountant's report requirement. But you are still subject to the SRA Accounts Rules, including Rule 7 on interest.
For firms that do require an accountant's report, the accountant will typically ask to see your fair interest policy and a sample of interest calculations. They may also review your client account reconciliations to ensure interest is being properly accounted for.
For more on the accountant's report process, see our SRA Accounts Rules services.
Practical Steps to Get Compliant
If you are unsure whether your firm is compliant with SRA Rule 7, take these steps:
- Review your current fair interest policy. If you do not have one, draft one immediately.
- Set a reasonable de minimis threshold based on your administrative costs.
- Ensure your practice management system calculates interest correctly.
- Train all fee-earners on the policy and their obligations.
- Include the policy in your terms of business for new clients.
- Review your client account records for the last 12 months to check if any interest was due but not paid.
- If you find unpaid interest, pay it to the client and document the correction.
If you need help drafting a fair interest policy or reviewing your compliance, speak to a legal-sector-specialist accountant. We can help you avoid SRA action and protect your firm's reputation.
Contact our team for a free firm health check focused on your client money compliance.