How Should a Law Firm Handle Client Money Interest Under SRA Rule 7?

What Does SRA Rule 7 Actually Require?

Rule 7 of the SRA Accounts Rules 2019 governs interest on client money, and it is one of the most frequently misread parts of the rulebook. The operative wording is short. Under Rule 7.1 you "account to clients or third parties for a fair sum of interest on any client money held by you on their behalf". Under Rule 7.2 you may, by written agreement, come to a different arrangement, but only where you "provide sufficient information to enable them to give informed consent".

Two points follow immediately. First, the obligation is to a "fair sum", not to every penny of interest the bank pays. Second, the standard is fairness, assessed by the amount held and the period it is held for, not a bright-line figure handed down by the SRA. The rule deliberately leaves the firm to translate "fair" into a written, defensible policy. That policy is what an inspector, your accountant and a complaining client will all measure you against.

The rule bites on all client money held in the client account: completion monies on a conveyancing matter, a litigation settlement awaiting distribution, probate funds held during administration, or money held to a third party's order. If it is client money under Rule 2, Rule 7 applies to the interest on it.

For the wider framework around the client account, reconciliation and the accountant's report, see our SRA Accounts Rules Essentials guide.

The Fairness Test: Amount and Duration, Not Just Time Held

The single most common error is to assume that money held for a short period carries no interest obligation. That is not what Rule 7 says. The test is whether the sum of interest that would accrue is fair to pay, judged on the actual balance and the actual number of days held. A short hold of a large sum can produce interest that a client would reasonably expect to receive; a long hold of a trivial sum may not.

So the fairness assessment has two moving parts working together:

• Amount held. The larger the balance, the faster interest accrues to a level that is clearly fair to pay.
• Duration. The longer it is held, the more accrues, but duration alone never makes interest payable or unpayable; it is one input.

This is why "we never pay interest on completion monies because they are only held for a day or two" is not a defensible position. The defensible position is a written policy that applies a consistent de minimis to the calculated sum, whatever the duration. Consider, illustratively, a balance of £200,000 held for fourteen days. Even on a modest deposit rate, the accrual runs into the tens of pounds, comfortably above a sensible de minimis. The same de minimis applied to £4,000 held for ten days produces a sum measured in pennies, which the policy would let you retain. The duration is similar; the fair outcome differs because the amount differs.

Setting a Documented Interest Policy

Every firm that holds client money should have a written interest policy, approved at management level and applied consistently. The SRA does not prescribe its contents, but a policy that an inspector will accept covers the following:

• The de minimis threshold. The minimum accrued interest below which the firm will retain rather than pay. Express it as a sum of interest per matter, and record the reasoning that ties it to your actual administrative cost of calculating and paying small amounts.
• The reference rate. The rate you use to calculate interest, normally linked to what the client account actually earns. State the source so the figure is auditable.
• The calculation basis. Daily accrual on the cleared balance, the day-count convention you use, and whether you calculate on a designated balance or an apportioned share of a pooled account.
• The de minimis policy thresholds in practice. How the threshold is applied to short holds, interim payments on long-running matters, and matters where the balance fluctuates.
• Disclosure. How and where you tell clients about the policy (see the client-care section below).
• Record-keeping. How a decision not to pay interest is evidenced on the file.

The de minimis is the part the SRA scrutinises hardest. A low single-figure or low-tens threshold is straightforward to justify on cost grounds. A threshold set high enough to retain sums a client would plainly regard as theirs is the danger zone: it converts a fairness rule into a revenue line and invites challenge. The policy must read as a genuine cost-based cut-off, not as a device to keep interest.

How Do You Calculate the Interest?

The mechanics are simple; the discipline is in applying them every time. You need the cleared balance, the number of days held, and the reference rate from your policy. The standard daily-accrual formula is:

Interest = (Balance x Rate x Days held) / 365

Apply it to the calculated accrual, then compare that accrual to your de minimis. If it is at or above the threshold, you account to the client for it. If it is below, your policy lets you retain it and the file note records why. The key compliance behaviour is that the same calculation and the same threshold are applied to every matter, so the outcome is driven by the policy rather than by who happens to be running the file.

On a pooled client account, which is what most firms operate, interest is calculated on each client's notional share of the pooled balance for the period it was held, not on the account as a whole. On a separate designated deposit account opened for a single client or matter, the bank pays interest referable to that balance and it belongs to that client; the firm cannot absorb it. Both methods are permitted, and Rule 7 applies to each.

Most practice management systems will run the daily accrual automatically if the reference rate and de minimis are configured correctly. Where the calculation is manual, keep the worked figures, because your reporting accountant will sample them.

Accounting for Interest Between Client and Office Account

Getting the bookkeeping right matters as much as the policy, because the wrong ledger movement is itself a breach. Two distinct flows arise:

• Interest you owe the client. This is accounted to the client. In practice it is either paid out to them or credited to their matter ledger and then released with their funds when their money leaves the client account. It is the client's money, so it is dealt with through the client side.
• Interest you are entitled to retain. Where the accrual is below your de minimis, the retained amount is the firm's income. It is transferred to the office account and recognised in the firm's books. Retained interest must not be parked in the client account; client account is for client money, and leaving firm income in it is a Rule 3 problem as well as a Rule 7 one.

The boundary to watch is therefore simple to state and easy to get wrong: amounts due to clients flow through the client side and out to the client; amounts the firm may keep are moved promptly to office account as income. Interest due to a client should be accounted for promptly after the client's money is paid out rather than left to accumulate untracked, and on long-running matters you may need interim interest accounting rather than a single year-end sweep. For the underlying distinction between the two accounts, see office account versus client account, and for how this all surfaces on the regular reconciliation see client account reconciliation frequency.

Disclosing Your Interest Policy in the Client-Care Letter

Rule 7 works hand in hand with your client-care obligations. The interest policy should be disclosed to the client at the outset, normally in the client-care letter or terms of business, so the client knows that you will account for a fair sum of interest, that a de minimis applies below which interest is retained, and how the sum is calculated. Clear disclosure manages expectations, reduces complaints, and demonstrates that the policy is being operated openly rather than as a hidden retention.

Disclosure also underpins the Rule 7.2 route. If you intend to depart from the default and agree a different interest arrangement with a client, Rule 7.2 permits it by written agreement, but only where you have given the client sufficient information to give informed consent. A passing line buried in standard terms is unlikely to meet that bar for anything other than the ordinary de minimis position. A genuine alternative arrangement needs the client to understand what they are agreeing to and what they are giving up.

When Interest Can Be Retained, and When It Cannot

Retaining interest is legitimate where the accrued sum sits below your documented de minimis. That retained interest is a recognised, if modest, income line, provided it is moved to office account and the policy that generated it is fair. What is not legitimate is using a high threshold to sweep up interest that is plainly due, or applying the policy inconsistently so that some clients are paid and others in the same position are not.

The SRA assesses the overall fairness of the policy and its application. A firm that can show a sensible cost-based de minimis, a consistent calculation, contemporaneous file notes for decisions not to pay, and disclosure to clients is in a strong position even if an isolated figure is later debated. A firm with no written policy, an unexplained high threshold, or no records is exposed. For how this connects to wider client-money compliance and the COFA's role, see our COFA compliance support.

How Interest Practice Shows Up in the Accountant's Report

If your firm has held client money in the period, you will normally need an accountant's report, and the reporting accountant will look at interest. Expect them to ask for the written interest policy, a sample of interest calculations, and evidence that retained interest reached the office account and paid interest reached clients. Weaknesses they commonly flag are the absence of a policy, an unjustified de minimis, and interest left sitting in the client account.

A firm is exempt from obtaining the report under Rule 12.2 only in narrow circumstances: where all the client money held in the period was money received from the Legal Aid Agency, or where the statement or passbook balance did not exceed an average of £10,000 and a maximum of £250,000 (or the foreign-currency equivalent) across the accounting period. Both balance limbs must be met. Note that this is the report exemption only: even an exempt firm remains fully subject to Rule 7 and the rest of the Accounts Rules. The exemption is frequently misquoted, so if you are testing whether you qualify, work it through carefully against the detail in our accountant's report exemption thresholds guide.

Common Mistakes With Client Money Interest

The recurring breaches cluster in a few places:

• Operating with no written interest policy at all.
• Treating all short holds as automatically interest-free, ignoring the amount.
• Setting a de minimis high enough to retain sums clients would regard as material.
• Applying the policy inconsistently between matters and fee-earners.
• Leaving retained interest in the client account instead of moving it to office account.
• Failing to disclose the policy to clients in the client-care letter or terms of business.
• Keeping no file note of a decision not to pay interest.
• Misstating the Rule 12.2 report exemption (it is an average of £10,000 and a maximum of £250,000, not a £250 average).

Practical Steps to Get Rule 7 Right

1. Put a written interest policy in place, approved at management level, and review it at least annually as deposit rates move.
2. Set a de minimis you can justify from your actual administrative cost, and record the reasoning.
3. Configure the reference rate and de minimis in your practice management system so accruals are calculated consistently.
4. Define how interest due to clients is accounted to them, and how retained interest moves to office account.
5. Disclose the policy in your client-care letter and terms of business, and use the Rule 7.2 written-agreement route only with genuine informed consent.
6. Note on each file where a decision is taken not to pay interest under the de minimis.
7. Review the last twelve months for any interest that was due but not accounted for, and correct it promptly if found.

If you would like a second pair of eyes on your interest policy, your de minimis, or how interest is moving between client and office account, our team works only with law firms and reviews this as part of a broader client-money compliance check. Contact us for a free firm health check focused on your SRA Accounts Rules compliance.