The Solicitors Regulation Authority (SRA) wants to stop solicitors pocketing interest earned on client money, under plans reported by the Law Society Gazette.

The proposal, announced by the regulator for solicitors in England and Wales, targets a long-standing practice in which law firms retain interest generated on funds held in client accounts. Under the current SRA Accounts Rules, firms must pay a fair sum of interest to clients in certain circumstances, but the rules allow firms to keep interest in a range of situations — and the SRA has now concluded that this outcome no longer sits comfortably with the public interest.

The reform forms part of the SRA's continuing review of its regulatory framework, which in recent years has already seen the Accounts Rules slimmed down from more than 20 pages to a fraction of that length, shifting responsibility onto firms to keep client money safe and to account for it properly.

Why the regulator is acting

Client money is a defining feature of conveyancing, probate and litigation work. Firms routinely hold significant sums — deposits, completion monies, estate distributions, damages settlements — sometimes for months. Even at modest interest rates, aggregated across the profession, those sums generate substantial returns.

The SRA's concern is straightforward. Interest arises on money that belongs to the client, not the firm. Where firms keep it, the regulator considers there is a risk that the public could see the arrangement as solicitors profiting from other people's funds — a reputational question as much as a legal one.

Consumer expectations have also shifted. Since the SRA last revisited the rules in detail, retail banking has moved to near-universal instant access accounts, and clients increasingly expect that money held on their behalf works for them.

What the current rules say

The SRA Accounts Rules 2019 require firms to pay interest to clients where it is fair and reasonable to do so, taking into account a range of factors: the amount held, the duration of the holding, the rates the firm could have obtained for the client, and the terms of the retainer.

The rules, however, contain latitude. Firms may agree with the client how interest will be treated, and small amounts may go unpaid where the administrative cost of payment would exceed the interest itself. The cumulative effect, the SRA has signalled, is that firms can lawfully retain meaningful amounts of interest generated by client funds — the outcome the regulator now proposes to end.

Practical consequences for practitioners

For firms, the practical effect of the reform would be felt most sharply in high-volume, high-balance practice areas. Conveyancing practices that hold completion monies for short periods, and probate departments administering estates over many months, would need to review their banking arrangements, their client care letters and their interest policies. Firms that currently treat retained interest as a meaningful revenue line would need to model the impact on profitability and consider whether fee structures need adjusting. Compliance officers for finance and administration (COFAs) should expect closer scrutiny of interest handling in forensic or routine audits once any new rules take effect.

There is also a contractual dimension. Many retainers and client care letters currently address interest expressly. Any rule change would require firms to revisit their standard terms to ensure they remain accurate and compliant, and to ensure clients understand exactly what they will receive.

Next steps

The proposal sits within the SRA's wider reform programme. As with previous changes to the Accounts Rules, any move to restrict firms' ability to retain interest would be subject to consultation before implementation, giving the profession an opportunity to respond on matters such as de minimis thresholds, transitional periods and the treatment of existing retainers.

Practitioners should watch for the formal consultation papers and assess their exposure now: identifying how much interest the firm currently retains, from which practice areas, and on what contractual footing.