DSBA President's Message- Negative Interest Rate Updates

                                                                NEGATIVE INTEREST RATES UPDATE

Further to my message on this important topic that was circulated on 1 December 2020, I wish to update you in relation to recent developments.

AIB, Bank of Ireland, Barclay’s Bank and Ulster Bank have notified legal firms of their intention to introduce a negative interest charge on all monies, including home mortgage loans, held in solicitor client accounts. Dublin Solicitors Bar Association along with the Law Society of Ireland and other bar associations are campaigning for solicitor client accounts to be exempt from these proposed new charges.

Chief among our concerns is that solicitor accounts are transactional in nature and not akin to savings accounts. To impose a negative interest charge on solicitor accounts will be hugely disruptive for transactional activity conducted through law firms and pose an unfair financial burden on our clients. We agree with the Law Society that such charges are unjust and contrary to public policy and consumer protection. While this fight continues, unfortunately at this time these calls are not being heeded by the Banks and we must prepare for the changes that now appear imminent.

The extent of these charges as currently known is outlined in the table below;

Bank

Effective Date

Account Balance

Negative Interest Rate

Allied Irish Banks plc

5 February 2021

€3 million

-0.5%

Bank of Ireland

1 March 2021

€2.5 million

-0.65%

Barclays Ireland

2 January 2021

€2.5 million

-0.65%

Ulster Bank

July 2020 (discretionary)

€1 million

-0.9%

 

The financial implications (amongst many others) are significant. For context, a negative interest rate of 0.5% on a client deposit account of €3m would equate to interest payable of €15k per annum.

In accordance with Central Bank guidelines, all customers must be given at least 60 days’ notice of any change in bank charges. While this provides some additional time to get ready for the impact of these charges, such preparations should now be an immediate priority for all firms.

Of practical significance, when a client is paying their borrowed money out to complete a property purchase they will have less money than when they received the loan as a result of the imposition of this charge.  A similar situation will exist for those who are selling and paying off a mortgage. Clients will need to have additional money to make up this difference. Put simply, consumers in conveyancing and other transactions will have to pay more money to meet the contract price. The administrative burden on solicitors in calculating the impact for particular clients is also very significant.

While the rationale of the ECB in applying negative interest charges to Banks was to promote lending, commerce and transactions and to stimulate the economy, the imposition of this charge on client accounts held with solicitors for the purpose of doing transactions has the opposite effect.

 

The law governing interest on solicitors’ client accounts is set out in Regulation 8 of the Solicitors Accounts Regulations 2014. This regulation provides for interest which accrues to deposits and is silent as to negative interest that may be applied to deposits. The Regulation does not expressly provide that the cost of keeping money on deposit can be passed on to clients. However, on the basis that negative interest amounts to a charge, it is the view of the Law Society that no changes to the Regulations are required. 

So what can solicitors do to prepare for these new charges?

There are a number of steps that firms can take within the existing regulations to minimise their exposure to charges.

Firstly, letters of engagement/ terms of service /section 150 letters should be updated so they make it clear that negative interest charges may be passed on to the client. Make sure you have a clear policy on how your firm handles such interest on client accounts.

Secondly, you may consider moving client monies to another practice account depending upon what each bank decides to do and depending on your client’s instructions when notified about the imposition of such charges. There are a number of banks providing services in the State who have not yet decided to introduce these charges and it may be worth exploring opening new accounts with these institutions.

Thirdly, you should check the level of current client account balances and consider whether such funds should be offered to be returned to clients for their safekeeping to avoid the incurrence of this charge.

Finally, you should monitor carefully further any correspondence from your Bank which will give you advance warning of any change in interest rates.

The longer effect of these charges may lead to solicitors being reluctant to hold onto client monies. Perhaps, these new charges will lead to a wider discussion as to whether solicitors should hold client monies as extensively as we do or at all and whether models that pertain in the United Kingdom and other European countries such as Third Party Managed Accounts (TPMAs) should be introduced for firms in this jurisdiction.

DSBA is at the forefront of the wider campaign to request AIB and Bank of Ireland in particular to exempt solicitor client accounts from these new charges in order to reduce unnecessary financial pressures on clients and reduce unnecessary administrative burdens on solicitors’ firms. You will have received our President’s Message when this issue first arose on 1 December. As your representative body, at a very early stage we raised this matter with the Law Society of Ireland and with various political and media figures. We will continue press this issue and to keep you informed of developments.