Law firm compliance news
August 2025
Client account interestClient account interestCharging for firm expensesTPMAsCyber crimeVAT inspections
Welcome to the first instalment of our quarterly law firm compliance update series. If there are areas of focus that you would like to see featured, please do let us know.
Client account interest
This area remains a hot topic amongst COFAs, with the debate continuing to be ’what is a fair amount of interest.’ While the current Accounts Rules do not stipulate a de-minimis interest amount that should be paid to clients or third parties, or any indication of what a fair rate of interest is, client account interest did feature in the SRA’s recent consumer protection review, and hinted that in future the SRA may seek to stop firms profiting from interest earned on client accounts.
We are aware that certain banks offer virtual client accounts that automatically credit interest to the individual accounts, which reduces the administrative workload associated with client account interest.
Crowe’s 2024 Law Firm Benchmarking Survey found that over 75% of participants earned more than 1% of their revenue from client account interest, which is clearly a significant amount. If firms can no longer earn money from client account interest, this may present a downturn in income that firms need to address as a priority.
A challenge that continues to present itself is the late credit of interest after client matters are concluded – it is important to ensure that fee earners are requesting interest credits at the appropriate time, to reduce the risk of residual client balances caused by interest.
While there is no clear indication of future announcements from the SRA at the moment, firms are reminded to regularly review their interest policies and document any judgements that they have applied when concluding on what they deem to be fair to clients.
Taking money for your firm's costs
As we continue to prepare AR1 Accountant’s reports for firms, it is apparent that there can be inconsistencies in the application of a firm’s processes for client to office account transfers in respect of properly issued bills or other written notifications of costs. While the old ’fourteen-day rule’ is no longer in the Accounts Rules, Rule 4.1 requires firms to keep client and business money separate. It is important to ensure that clients have received a bill or other written notification of costs prior to client monies being transferred from the client to the business account.
Where funds are held in a client account to help mitigate the firm’s credit risk, it is important to remember the importance of regular billing and avoiding an accumulation of WIP and potential bad debt risk.
Third Party Managed Accounts (TPMAs)
We are aware that some firms have made some preliminary investigations into TPMAs and potentially delved a little further and had meetings with TPMA providers to discuss what an offering could look like. Some firms that have investigated the option of a TPMA have concluded that they have been unable to satisfy themselves on the interaction between the SRA Accounts Rules and the Solicitors' Code of Conduct, which requires firms to safeguard client assets.
Other barriers to adoption include a general feeling that there would not be any significant benefit to the firm or the client, a perceived lack of control over funds and the transactional costs levied by the provider when using a TPMA.
Cyber crime
As a reminder, firms’ risk of cyber crime remains ever-present, with criminals developing more sophisticated and convincing mechanisms to attempt to defraud firms. Law firms remain an attractive target because of the significant client balances held, and fraudsters are alert to key events that may place additional pressure on law firms, for example the recent SDLT deadline in March 2025.
While firms often have disaster recovery plans, we discussed the importance of regularly testing them to ensure that they are effective and would allow the firm to operate in the event of a cyber-attack. Recent high-profile attacks have led to extreme disruption to both the victims, their customers, and their suppliers.
VAT Inspections
HMRC are turning up the dial on compliance visits, and inspections are currently very common amongst law firms. We discussed both desktop based and in-person inspections and some top tips on how to prepare for a visit.
If you are due to be visited by HMRC, you may find this article useful.
If you would like to join us for the next COFA meeting, which is due to be held in January 2026, please contact Ryan Ketteringham or Mark Adderley.
Law firm compliance news
November 2025
Contact
