Plans to enhance the security of client money held in solicitors’ bank accounts could be scuppered by an EU proposal to cap payouts following bank failures.
The UK’s Financial Services Authority last week suggested increasing to £500,000 the upper limit of compensation for ‘temporary high balances’, such as those in solicitors’ client accounts. The maximum compensation currently available under the Financial Services Compensation Scheme (FSCS) is £50,000.
The FSA also suggested that court awards and settlements for personal injury should be compensated in full, even if more than £500,000.
However, the European Parliament and Council recently amended a directive on deposit guarantee schemes, proposing an EU-wide €100,000 (£90,000) cap on compensation payouts from the end of 2010. An ongoing European Commission review, due to report at the end of this year, will decide whether the cap is appropriate. If that happens, the FSA’s proposals will almost certainly be overruled.
Concern about the safety of solicitors’ client accounts arose after the near-collapse of HBOS and RBS at the end of last year (see [2008] Gazette, 25 September, 1). Accountants BDO Stoy Hayward estimated that solicitors hold up to £1bn of client money in pooled accounts; the Law Society has estimated up to £3bn.
Mark Stobbs, head of legal policy at the Law Society, said Chancery Lane has already contacted the commission on the matter and will prepare a response over the summer. He said the Society will lobby the commission to ensure solicitors’ client accounts are properly protected, and will suggest that the FSA’s plans to increase compensation for temporary high balances be adopted across the EU.
The FSA said it will provide advice to Treasury ministers should they choose to make representations to the commission, though the authority will not make direct representations. The Treasury declined to comment.
In its consultation paper, the FSA said protection for temporary high balances is necessary to protect consumers because ‘many consumers, with quite modest levels of capital, could be at risk of serious loss through no fault of their own’.
Up to £500,000 would be available to protect: sales of a primary residence; pension lump sums; inheritances; divorce settlements; redundancy payments; and proceeds of term, critical illness and income protection insurance with no investment element.
Stobbs said the Society will canvass the profession on whether other types of deposit should be included before making a submission to the FSA.
FSCS protection will still not apply to client funds if that client is deemed to be a ‘large business’, as only individuals and small business are protected by the scheme.
No comments yet