Client money held in solicitors’ bank accounts could be given far greater protection in the event of a bank collapse, under changes proposed by the Financial Services Authority.

The FSA is suggesting increasing the upper limit of compensation for ‘temporary high balances’, which includes money held by solicitors in client accounts, to up to £500,000. It is also proposing that court awards and out-of-court settlements for personal injury should be compensated in full, even if more than £500,000.

The maximum amount of compensation currently available under the Financial Services Compensation Scheme (FSCS) is £50,000.

Solicitors have previously voiced concerns over their liability should client money be lost in the event of a bank collapse.

‘The key argument in favour of extending some form of protection to temporary high balances is that without this, many consumers with quite modest levels of capital could be at risk of serious loss through no fault of their own,’ the FSA said in the consultation paper. ‘It is true that they might only be at risk of loss for a short period of time, but if the risk crystallised the consequences could be very serious. On balance, we consider that additional protection for a limited number of cases is desirable.

‘We consider that there should be exactly the same FSCS protection when money is held in a client account as when it is held in a consumer’s own account. So we are proposing that the same temporary high balances would be protected, for the same amounts and for the same time periods.’

The FSA said firms will need to inform clients of the new scheme, should it be implemented in full.

The proposed upper limit of £500,000 would apply to:

  • sales of a consumer’s primary residence or of a property bought for dependent relatives for use as their primary residence;
  • pension lump sums;
  • inheritance;
  • divorce settlements;
  • redundancy payments; and
  • proceeds of pure protection;
  • contracts (term, critical illness and income protection insurance, where there is no investment element).

The FSA has published a consultation paper on the matter, FSCS: temporary high deposit balances and implementing changes to the Deposit Guarantee Schemes Directive, which is available on the FSA website.