Client money deposited in a bank account by a solicitor must receive better protection under European law in the event that the bank collapses, the Law Society has warned the European Commission.

In a letter to the European commissioner for the internal market and services, Law Society president Robert Heslett says that the proposed EU-wide €100,000 (£87,000) compensation cap is insufficient for all types of bank account deposit.

‘Citizens will often have large amounts of money deposited in a bank account for a short period of time,’ he said. ‘This amount will usually constitute a large part of that individual’s personal wealth, for instance, when a house is sold, inheritance from a will is paid, or a compensation payment is made. Whether greater protection is provided in the forthcoming proposal for a directive or member states are allowed to provide it, we do not believe that the fixed sum of €100,000 offers sufficient protection to depositors.’

The Financial Services Authority had last year proposed to increase to £500,000 the upper limit of compensation for ‘temporary high balances’, such as those in solicitors’ client accounts. 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 amended a directive on deposit guarantee schemes, proposing an EU-wide €100,000 cap on compensation payouts from the end of 2010. The European Commission was due to decide on the appropriateness of the cap at the end of 2009, but no report has yet been published.

Concern about the safety of money held in solicitors’ client accounts arose after the near-collapse of HBOS and RBS at the end of 2008 (see [2008] Gazette, 25 September, 1).