Money: Money tied up with solicitors? It's as well to take an interest

In case of a dispute over building work, you could be out of pocket if your money is kept in a low-interest account. Iain Morse tells a cautionary tale with implications for all householders

Back in 1990, Mr Hill decided to convert an old barn near Grantham into a family home. He engaged a local firm of builders, Ford Bros, to do the work. Things did not go as planned. By the end of the year he was in dispute with them.

Ford Bros engaged a firm of solicitors, Hegarty & Co, to act on their behalf. Agreement was reached whereby Mr Hill deposited pounds 10,379 with Hegarty's as the stakeholder, the money to be paid to Ford on satisfactory completion of the conversion.

Hegarty's held this money in a general client account run by Midland Bank from 18 January 1991, until 28 November 1994, crediting Mr Hill with interest of just pounds 590 over the period.

Not surprisingly, Mr Hill was aggrieved over this return. "It is less than inflation over the same period." After asking Lloyd's Bank to calculate gross interest payable on an instant access current account over the same period, he reckoned total interest could have been as high as pounds 2,444.37, and on this basis he was owed pounds 1,800 in lost interest.

Meanwhile, Ford Bros had gone into receivership, after failing to complete work on the barn to a satisfactory standard. Mr Hill was obliged to bring in another builder, who finally completed the conversion at a cost of pounds 13,000.

What complicates the story is that Mr Hill's money was kept in a general client account by Hegarty's because the receiver appointed to wind up Ford Bros failed to agree that it be either returned to Mr Hill or moved into a higher interest paying "designated deposit account".

The distinction between these types of account is important. Banks offer general client account facilities paying a low rate of interest but offering "free" benefits, eg electronic cash transfer. Access to funds is instant; interest may be tiered according to the balance.

However, solicitors holding large sums for a client over any period of time would normally move them into a designated account held in the client's name and paying a high rate of return.

"I rang the receiver, sometimes every day, asking him to release the funds," explains Mr Hill. "He was unfailingly courteous, promising to act at once, but then did nothing."

Finally, in October 1993, Hegarty's contacted Mr Hill explaining that they had received instructions to release his money, but only after deduction of their own costs. These amounted to pounds 1,011.76, which would have returned just pounds 9,929.17 to Mr Hill.

"Someone more naive might have accepted this, but I knew that the receiver had no right to allow Hegarty's to deduct costs. For what? All they did was keep my money at a scandalously low rate of interest."

Matters were eased by the appointment of new receivers, who agreed to Mr Hill's request that his money be transferred to a building society account paying higher interest. By 12 June 1995, the new receivers had instructed Hegarty's to release Mr Hill's original capital and interest paid on it, without deducting any costs.

Meanwhile, Mr Hill pursued a complaint against Hegarty's on the basis that the firm had failed to pay him reasonable interest while holding his money in a general client account. The Solicitors Complaints Bureau (SCB) first heard from Mr Hill on 17 January 1994. More than two years were to elapse before they finally ruled on the matter, finding that Hegarty's had not breached the rules covering conduct of client accounts.

"The next step had to be a complaint to the Legal Ombudsman and I am happy to say they awarded me compensation of pounds 250 for the incredible delay by the SCB in handling my complaint," says Mr Hill, but he was not so satisfied by the outcome of his case against Hegarty's.

The Ombudsman's report supports the SCB's decision not to find Hegarty's guilty of misconduct, but with "considerable reluctance" going on to point out: "The rules themselves which, on the basis of the bureau's own calculations permit a solicitor to pay interest of only pounds 590 on a deposit of pounds 10,379 held for almost four years ... must be unacceptable."

To be fair, Hegarty's topped up Mr Hill's interest with a further payment of pounds 45, and its managing partner, Richard Hegarty, points out: "We were caught in a difficult situation acting for the builder while the work was completed.

"We are not a bank, obliged to move client's money to the highest paying account available in the whole market ... and received no instructions about interest when we received the original money."

Despite this, existing guidelines issued by the Law Society state: "Solicitors should aim to obtain a fair rate of interest on monies held in a general client account. The rate of interest may not be the highest rate obtainable, but it is not acceptable simply to look at the lowest rate obtainable."

In practice, solicitors are not expected to look beyond existing banking arrangements when looking for a "fair rate" of interest. Mr Hill is taking Hegarty's to the Small Claims Court for lost interest, but concedes: "What hope have I got against the whole legal profession?"

Meanwhile, the Office of the Legal Ombudsman is also not happy. "Lay clients may not realise how badly they can fare under the existing rules, and the matter will be mentioned in the Ombudsman's next report."

Mr Hill advises: "If you are giving any money to your solicitor, ask them for a written statement of the type of account it will go into, and how much interest you will receive."