Consumers ‘will pay price’ if banks impose charge on solicitor accounts

Consumers will "pay the price" if banks do not exempt solicitor client accounts from proposed new negative interest rates, while there will also be "huge disruption" to the economy, the Law Society of Ireland has warned.

Irish banks are preparing to impose negative interest rates on some accounts, which means customers will effectively be paying their bank to hold their savings rather than getting any return.

Banks have been paying the ECB to hold their excess funds since 2014. However, the ECB imposed negative rates as part of a policy to encourage more lending. Initially, the banks took the financial hit themselves but increasingly they are now passing it on to customers.

Charges

In a statement on Tuesday, the Law Society of Ireland said it was calling for solicitor client accounts to be exempt from the new charges.

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The call comes as solicitors who are customers of AIB or Bank of Ireland were notified of the banks' intention to introduce a charge on all monies, including home mortgage loans, held in solicitor client accounts.

Law Society director general Ken Murphy told The Irish Times the move would be “hugely disruptive” for economic activity.

“It is bad for economic activity because there will be uncertainty around the amount of money required for a particular transaction,” he said. “The money eroding on a daily basis will need to be topped up by additional funding, unplanned for probably.

“In other words, every day that passes, the funding for the transactions diminishes, so it’s going to be hugely disruptive to economic activity which is badly needed in the middle of a pandemic.”

Mr Murphy said the amount of money in these types of accounts at any one time is “in the order of many billions of euro” with estimates ranging from €5-10 billion. The “great majority” of solicitor firms will face these charges, he said.

Mr Murphy also said there had been extensive engagement with the two banks, but that they remained “unmoved”.

“We wrote to the banks before Christmas,” he continued. “Since then we have had high level meetings with both AIB and Bank of Ireland. They have listened to us but are unmoved.

“They don’t see that it is wrong to apply negative interest rates to these types of bank accounts.”

Law Society of Ireland president James Cahill said the group was "deeply disappointed at this latest attempt from the banks to increase profits by penalising consumers, particularly future homeowners who already face significant financial challenges".

“The proposed new charges, so-called negative interest, on monies held in solicitor client accounts are unjust, over-charging and contrary to public policy and consumer protection,” he said.

“The banks have wrongly included solicitor client accounts in their general application of negative interest rates, which they maintain apply to savings accounts. Solicitor client accounts are not savings accounts; they are a necessary part of commercial and conveyancing transactions.

“Put simply, when a person is paying out their borrowed money to complete the property purchase they will have less money than when they received the loan. A similar situation will exist for those who are selling and paying off a mortgage.

“As a direct result of this charge, they will need to have additional money to make up the difference.”

Mr Cahill added that “everyday consumers will lose out” if the banks proceed with the move.

Costs

In response to queries, both Bank of Ireland and AIB said the charges were unavoidable as they have incurred significant costs.

“Over the past few years, we have been engaging with customers with larger balances as part of passing on these costs,” said a spokesman for AIB.

“In recent months we have shared details with the Law Society, advising that interest rates as a cost of doing business were unavoidable.

“To support customers through this transition we are in the process of contacting the impacted customers with larger balances to provide details of the process and the timelines impacting them directly. We will continue to engage with the Law Society as we apply these negative rates.

Rates

“To assist the profession in ensuring client transactions continue to run smoothly, we have offered solicitors the option to have any negative interest due on a solicitor’s client account deducted from an alternative account such as the solicitor’s office account, ensuring the balance on the client account remains intact.”

A spokesman for Bank of Ireland pointed out that negative rates “currently apply to large deposits” held by institutional and corporate customers and SMEs.

“We have recently written to a number of customers to inform them about a rate change to their business current and deposit accounts,” he said. “These firms have held a minimum average of €2.5 million on deposit for the past 12 months.

“The bank’s relationship is with the firm, which is the account holder. Bank of Ireland’s current negative interest rate threshold is significantly higher than in some other European Union countries where negative interest rates have been applied.”