Lawyers hold varying amounts of client cash for days, weeks or months, depending on the client and legal situation. Determining the best way to manage this money, while keeping client interests at heart and meeting regulatory obligations, can be challenging. Below Lawyer Monthly speaks to Giles Hutson, CEO at Insignis Cash Solutions, on the effective management of client cash.
Regular evaluation of available interest rates to identify the best home for cash is not a core function for legal professionals, and can often be overlooked due to time pressures and other obligations.
A recent change to the Client Assets sourcebook (CASS) regulation allows firms to place client money in bank accounts with unbreakable terms of longer than 30 days. This has ramifications for how lawyers handle client cash as they can now consider a broader range of bank accounts than previously possible. This opens up the market and gives lawyers a far broader ability to manage cash effectively; a very positive step for clients.
Along with CASS changes, there have been some influential drivers in the banking industry pushing for better cash management. New regulatory changes such as the introduction of Open Banking and the Payment Service Directive 2 (PSD2) have made a significant difference, allowing increased access and transparency for clients, lawyers and cash management companies. Technological advances have also made it possible for cash management services to integrate with the banking system to provide clients with a more efficient proposition.
Managing cash; what to consider?
Lawyers need to consider several factors when looking at the cash investment, namely, the security, liquidity and return for each scenario and client. Choosing where to invest funds for example from divorce proceedings or major asset disposals, while keeping them protected and retaining their value, is tricky.
They must also assess the risk. Financial Services Compensation Scheme (FSCS) protection, currently available for amounts of up to £85,000 per bank institution is an ideal way to protect client money. For larger amounts, funds should be split across a number of accounts to maximise protection It’s also important to be aware that the FSCS temporary high balance allowance gives an individual up to £1 million of protection for a six-month period. This should be maximised around major liquidity events such as the sale of a main residence, until the client finds an alternative.
Of course interest rates are another vital consideration to ensure a good return on client cash. It’s all very well placing the cash into an account, but to keep up to date with the interest rate that the account hinges on is important. In some cases, where a legal case goes on for longer than anticipated, client cash should be moved to a different account that can earn more interest for the client. Finding the best bank account that ticks these boxes involves shopping around, which can be an onerous task for time poor lawyers.
How Cash Solution services can provide a solution
Cash solutions services can identify accounts that best meet the end clients’ individual cash needs and help lawyers generate better returns in the short and long term.
When considering a cash management platform, it’s important to ensure that the clients’ liquidity requirements are met, factoring in the following elements:
- All monies should be stored in savings and deposit accounts with a UK banking license and covered by the FSCS deposit protection scheme
- The deposit must remain in the client’s name at all times
- There should be no government or corporate bonds
- No tied products such as current accounts
- No peer-to-peer investing
A managed account should keep up to date with any fluctuations in interest rates, banking terms and accounts, moving money when and where necessary, under instruction from the client or adviser. This is not a discretionary service; when a client wants to make a withdrawal, the cash manager will transfer funds back to their bank account.
Additional developments including inevitable increases in the Bank of England base rate, which impacts the interest rates on bank accounts, the end of the Term Funding Scheme in February, and increased competition with more challenger banks coming into the market, will go a long way towards ensuring that the returns for clients’ cash improve.
Active cash management takes advantage of technological advances as well as industry tailwinds such as regulatory change and growing competition. While these developments bring a host of potential day-to-day benefits for clients, the importance of active cash management, particularly during liquidity events cannot be ignored.