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Eligible deposits with UK institutions are protected by the Financial Services Compensation Scheme up to a maximum level of protection of £85,000 per person per institution.
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Certain professions (such as solicitors and accountants) may need to have a bank account put aside for client monies. This needs to be separate from the business’ bank account and will be used exclusively as a holding place for clients’ funds. This can be a short-term or a long-term issue, such as with funds that are being held temporarily for a matter of days through to more permanent arrangements designed to last for years.
In terms of the type of client account used, they are broadly broken down into two groups: the first is in the form of a collective pool of clients’ cash. In this example – which is often the most common – this would involve many customers sharing a single bank account, with all the funds due to those customers kept in that single client account. In such circumstances it is often the case that the customer will earn no interest on the money deposited with any profit going to the holding business. Commonly this is not a problem as the client monies are relatively small on an individual basis and reside in the account for only a short period of time.
The other form of client account relates to deposits of a more sizeable nature, such as where the money is being held in trust under the terms of an inheritance until the beneficiary comes of age. In this instance it is normal practice for the solicitor or accountant to open a client account exclusively for that person. No other clients will share the account and any interest made is typically left for the client for whom the account has been opened. However, some professions may charge a ‘handling fee’ to cover their own costs, such as only paying the client interest if the sum deposited is larger than £10,000.
The rules under which a professional business holds such funds should be clearly stated in advance so that you are fully aware of how client funds will be treated. There is also significant regulation over how client accounts must be managed by the company.
Regardless of whether the client account is a collective pool of several customers or a single, dedicated account, the monies are still protected by the UK depositor protection scheme, so that funds up to £85,000, or higher in certain circumstances, are safe in the very unlikely event of a bank going bust.
Client accounts come in a range of types, so take some time to consider what might be suitable for your business’s circumstances and those of individual customers. For example, if funds will be retained for years with no activity it might be wise to choose a higher-paying bond than an account which has easy access that won’t be required.
