Client money held in solicitors’ bank accounts could be given far greater protection in the event of a bank collapse, under European Commission proposals unveiled last week.

The commission proposed an EU-wide €100,000 (£83,200) cap on the compensation available for deposits that are lost in the event of a bank collapse. However, under its proposals, states would be able to choose to compensate temporary deposits above this €100,000 limit if they arose from private real estate transactions or ‘social reasons,’ such as ‘marriage, divorce, invalidity or [death] of a depositor.’

The UK’s Financial Services Authority last year proposed a £500,000 cap as standard, but suggested that court awards and settlements for personal injury should be compensated in full, even if they exceeded £500,000. In the UK, the level of compensation available under the Financial Services Compensation Scheme (FSCS) for any deposit is currently £50,000.

The commission will shortly submit a final text on its proposals to the European parliament and council for approval. The €100,000 cap is due to come into force at the end of the year.

The Law Society lobbied the commission to allow exceptions to the €100,000 cap. Law Society president Linda Lee said: ‘While we do not believe the maximum guarantee limit of €100,000 is enough to fully protect consumers across the EU, the option for member states to provide for protection above that amount in the proposals is a positive inclusion. The Society will study the proposals in detail and lobby to ensure this provision is retained in the final text. This will allow the FSA to pursue its proposals to protect more significant amounts of consumers’ money when it relates, for instance, to house sales or compensation payments.’

EC internal markets and services commissioner Michel Barnier said: ‘European consumers deserve better. They need reassurance that their savings, investments, or insurance policies are protected no matter where in Europe they are based.’

Concern about the safety of solicitors’ client accounts arose after the near-collapse of HBOS and RBS at the end of 2008. Accountancy firm BDO Stoy Hayward estimated at the time that solicitors held a total of up to £1bn of client money in pooled accounts; the Law Society has estimated up to £3bn.

FSCS protection will still not apply to client funds if that client is deemed to be a ‘large business’, as only individuals and small businesses are protected by the scheme.