The security of billions of pounds of client money held in UK banks was called into question this week following the apparent near-collapse of HBOS, Britain’s biggest mortgage lender.

Law firms across the UK reported being inundated with calls from clients worried that cash pooled in solicitors’ bank accounts – such as deposits on houses, compensation awards and money from estates – is largely unprotected.

Under the terms of the Financial Services Compensation Scheme (FSCS), large business­es receive no ­protection for money lost in the event of a bank collapse, while small firms and private individuals receive a maximum of £35,000.

Following discussions with the Solicitors Regulation Authority, Mark Stobbs, director of legal policy at the Law Society, said: ‘We concluded that if a bank account is held by a solicitor on behalf of a client and the bank goes bust, it is going to be the client’s problem rather than the solicitor’s. This is more a matter for the financial regulators.’

Stobbs said a client could sue a solicitor for loss only if a solicitor had been negligent with their choice of bank.

Tony Stevens, corporate account manager at Swedish bank Handelsbanken, called for legislation to deal with any potential banking collapse to protect client cash.

Accountants BDO Stoy Hayward estimated that solicitors hold around £1bn of client deposits, while the Law Society’s former head of legal policy, Richard Schofield, believes that figure is much higher – possibly up to £3bn.

To be classed as a small business under the FSCS, firms must satisfy any two of three conditions: they must have a turnover of no more than £6.5m a year; they must have no more than £3.26m in their balance sheet; they must have no more than 50 employees.

The FSCS said as long as the solicitor had informed their bank that they were depositing money from multiple clients into a single account, each client would benefit from the maximum £35,000 protection.