Basic principles re. interest?
- Firms should account to their client for any interest made on money in the client bank account.
- Onus is on firms to set their own policy on how interest is calculated/ paid
- Permissible to agree a different arrangement with an individual client
Likely provision in a policy re. interest?
Likely to provide that interest will be accounted for unless it is below a stated figure. Figure must be reasonable - will depend on size/ nature of the firm’s practice.
Two possible ways of dealing with interest?
a) money paid into a general client bank account and firm decides how to calculate interest by reference to its policy
b) firm opens a ‘separate designated deposit bank account’ for the money of that particular client
When might a firm open a ‘separate designated deposit bank account’?
e.g. if firm is likely to be holding a substantial amount of client money for a significant time
How is payment of interest on money in client account treated?
Paid from the business bank account, and effectively treated as an expense of the business.
What must be shown on client’s ledger account if using a separate designated deposit bank account?
Must show receipts and payments of client money dealt with through the SDDBA.
Can use either a separate ledger account, or separate columns on the ordinary client ledger account.
How are payments of cash recorded if using a separate designated deposit bank account?
Firm’s cash account must include details of receipts and payments of client money dealt with through the separate designated deposit bank account.
Could be a separate cash account for each designated deposit bank account or, (more likely), a combined cash account showing transactions on all the DDBAs
Is firm permitted to keep any interest earned on client money?
Yes, if client money is placed on general deposit, firms are allowed to keep any interest earned over and above what is required to be paid under the Rules.
Firm only has to pay the client the rate that is fair in relation to the amount held for that client.
Two methods of recording the SDDBA
- an additional column in the client ledger account
- a separate ledger account. In that case, the business columns are normally redundant, as the main client ledger already shows those transactions.
If a bank pays interest into the separate designated deposit bank account, how is this recorded?
CR on client’s new ledger account
DR on the deposit cash account
What if a payment needs to be made from the SDDBA, and the bank will not allow a payment from it directly (beause they will not accept payments from deposit accounts)?
- Total sum, including interest, must be transferred to the general client bank account
- Not necessary to wait for funds to be received into client bank account before making payment
Use of deposit bank accounts?
- Firm will put a proportion of its client money on deposit in a general deposit bank account
- Should earn more interest on its general deposit bank account that it has to pay to individual clients
- Interest payable will be treated as an expense of the business and recorded on an interest payable ledger account
