THE PRESS SATURDAY, AUGUST 29, 1981. Interest from trust money

Press, 29 August 1981, Page 14

THE PRESS SATURDAY, AUGUST 29, 1981. Interest from trust money

Many; legal transactions require people to deposit large sums of money with law firms for short periods. To handle such moneys, a all solicitors are required to operate trust accounts. As matters stand in New Zealand, money in such accounts does not attract interest from the banks. \ Lawyers’ clients who have funds which are hot required for some time may ask to have the money deposited, in trust, in an interest-bearing account. In such instances the interest accrues to the client.

.For several years the New Zealand Law Society has been seeking to have interest paid on solicitors’ general trust accounts. The amounts in these accounts fluctuate, within, quite wide limits, from day to day? A large law firm, for instance, might have/a daily credit of between $500,000 and $1 million in its accounts. In the country as a whole the daily total might be $2OO million or more. Lawyers have argued that, even though many deposits and withdrawals are being made from accounts, the banks know that the total in any account is unlikely to fall below a certain figure. The banks thus have the constant use of a predictable amount of money — often quite a large amount — on which they do not pay interest. Against that, the money is at call, just as if it were in a cheque account. Because each account may include money held in trust for many different clients, calculating and distributing interest for short periods to each client would be a considerable task.

Earlier, this week the Deputy Leader of the i Opposition, Mr David Lange, said that it ■ was-; the Labour Party’s policy that interest should be paid on solicitors’ trust accounts and that the interest should be used to pay for an extension of the legal aid scheme. The general idea is .not new. The Law Society has been asking successive Governments to legislate for interest to be paid on such accounts, but for the money to be used to finance a wider range of activities than the provision of legal aid — among them the promotion of community law centres, legal research, and legal education. -

Both proposals may seem attractive to some in the community, perhaps especially to lawyers to whom much of the revenue

from interest under either proposal would ultimately be paid. If banks are required to pay interest on money in trust funds, and if the money is used to finance the expansion of the legal system, this will amount to a specific tax on the banks to pay for activities for which they have no special concern or’responsibility: . . Why should the shareholders of banks, who in the instance of the Bank of New Zealand, are the people of New Zealand, be required to pay a special tax to the legal system? Why should people who have money in lawyers’ trust accounts for various periods be denied the interest, if interest is paid on their money? For that 'matter, if trust accounts are to bear interest, what of the ordinary cheque accounts of companies and individuals which may also have significant and stable amounts of money in. them for Various periods? Surely those accounts, too, should attract interest. The suggestion that interest may be paid on money held in cheque accounts has in fact been made. If such a course is eventually followed by the banks, the case for treating solicitors’ trust funds differently and for paying the interest for State purposes will look rather weak.

Should the Labour Party’s proposal go ahead, many people might well object to being compelled to have interest earned on their money used by others. Attempts would surely be made to reduce the amounts left in trust with legal firms, to reduce the time for which amounts are deposited, or to find secure, alternative short-term depositaries.

A good case may well be made for the payment of interest on trust accounts, especially when computer systems can make the book-keeping easier. A good case may also be made for an extension of the legal aid system, or the extension of such enterprises as community law offices. On the evidence available so far there is no good reason why the two activities should be linked, or why one should be required to pay for the other. If Mr Lange’s proposal was acted on, it would amount to a curious and unfair form of indirect taxation against those in the community who are obliged to seek the help of the law in matters that require them to deposit money with law firms.