SHOULD someone inheriting money be entitled to the interest that has accrued on that inheritance during the time it is held by the lawyer handling the estate?
The answer is not so straightforward as one might imagine, as chartered accountant Jim Clarke of Ayr discovered after his mother passed away last year.
As The Herald reports today, the estate was worth around £240,000, much of which was held by his solicitor for six months. Yet when the estate was finally settled, Mr Clarke was told he would get no interest because of a little-known ruling by the Law Society of Scotland in November 2011. This allows legal firms to keep interest earned on invested estates if it comes to less than £100. Mr Clarke was informed that the accrued interest amounted to just £67, because it was saved in an account that earned a paltry 0.25% interest. Mr Clarke estimates that he could have earned £400 interest on the same funds over the same timespan.
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Though his complaint to the Scottish Legal Complaints Commission was rejected, Mr Clarke is right to raise this issue because there would appear to be a conflict of interest in such cases.
Nobody is suggesting that his solicitors broke any rule or acted illegally. Nevertheless, as he points out, there appears to be a perverse incentive at work here. In fact, the incentive for solicitors is to minimise the return on the money in clients' accounts, so that it earns less than £100 interest and they can pocket the money themselves. The Law Society of Scotland talks of these arrangements being subject to "rigorous rules" but the arrangements in Scotland for handling the interest on clients' money appear to be less stringent than those that apply in England and Wales, following the 2007 Legal Services Act. South of the Border regulations stipulate that clients should be aware of the terms of a company's interest policy. And though a "de minimis" rule can be applied to interest, the suggested threshold is £20 on accounts opened in clients' names.
The Law Society of Scotland suggests the interest retained by legal firms is "to ease administrative processes and associated costs of setting up an individual account for every client". However, surely it would be clearer and fairer to make a set charge for this, if necessary, and itemise it on the client's account.
Clients should not be expecting the highest interest rate obtainable, as such accounts need to be of the instant access variety, but nor is the lowest rate of interest appropriate. This matter warrants further scrutiny since two-thirds of householders are now homeowners and the typical value of an estate is between £150,000 and £250,000. These small sums of interest should not be a nice little earner for solicitors. Legal firms should have a written policy on payment of interest that provides a fair outcome and they should ensure that clients know the rules.