A trip back in time…
If you’ve been around long enough, things from the past have a habit of making a comeback. Whether it’s flared trousers, space hoppers, or Britney Spears they’ve all had their turn back in the limelight.
Back in the early 90s, one of the key selling points of the Solomon II Practice Management software which I was selling to law firms was its ability to calculate deposit interest due on client money being held. Back then, it wasn’t unusual to visit firms who had hundreds of deposit accounts set up at the bank on behalf of their clients.
Not only were these a burden to administer, but the firms were also missing out on significant sums of interest to which they were entitled.
How could you use your Practice Management Software to earn more interest for your firm?
By pooling the client money together at the bank, firms could achieve a higher rate of return for the combined pot but were only liable to pay the client the interest that they would have earned had their money been held in a separate, designated deposit account. What’s more, under the Solicitors Accounts Rules, interest was only payable to the client if the individual amount held fulfilled the specific value and time held thresholds stipulated, so that, in many cases, no interest was payable to the client, yet their money earned interest for the firm in the pooled client account.
Think about it. Even in the 90s, it wasn’t unusual for firms to be holding several million pounds worth of client money. If they only managed to attract an additional 1% on the combined monies and held £1m in client account, then they would earn an additional £10,000 per annum. This alone was often more than enough to cover the investment in their new PMS.
Where will interest rates be in 2023?
Since the 2008 financial crisis, interest rates have remained at historic lows, so the benefits of this practice have been eroded to almost nothing. As such, managing client money in this way to generate additional interest has largely been abandoned.
However, following recent events, we are now back in an era where interest rates are rising fast; with predictions that they’ll hit 6% next year. In place of the thresholds, the Accounts Rules were updated along the way to stipulate simply that the client should be paid “a fair amount of interest”; although it’s still the case that no interest needs to be paid to the client if the amount earned is under £20.
This presents law firms with a great opportunity to once again generate income from the management of client money. At a time when the costs of running the firm are only going in one direction, this will come as a welcome boost to the bottom line of legal businesses.
How can you reap the benefits of this opportunity?
Without an automated system to manage this process, firms will struggle to implement and benefit from this opportunity. The administrative burden posed in ensuring that the firm keeps up to date records of monies held on behalf of clients whilst making sure that interest is paid when due will be significant and, for some, too much to consider despite the obvious financial benefits to the business.
Know how to use the tool in P4W
The good news is that P4W has always had a Deposit Interest Calculator; enabling firms to do exactly this. Given that it’s nearly 14 years since this opportunity was effectively taken away, there will be firms who have little, if any, knowledge of how to use the tool in P4W. In fact, Accesspoint were recently contacted by a large firm using P4W to ask how they could better manage their large number of client deposit accounts now that interest rates were rising. Once they realised that P4W has this ability built in, they were delighted that the functionality was already there having been braced for some bespoke development.
So, if your firm uses P4W and could potentially benefit from using the Deposit Interest Calculator, then don’t wait a minute longer to capitalise on this “interesting” opportunity.
As for those flares, they can stay in the back of the wardrobe, but I may just nip out for a bounce on my space hopper whilst listening to Oops!…I did it again!
Accesspoint Group Holdings
Disclaimer: Information provided above is for general guidance purposes only and should not be misconstrued as specific advice as to how client money should be handled. Each firm should always seek professional guidance before adopting any changes to current procedures.