Banking services – the law firm FD’s and their advisors’ opportunities

I was a full-time law firm FD until a couple of years ago. Now I help smaller firms by providing those services to them on a part-time basis. That has given me some spare time, during which I have had the opportunity to find out more about some of the less well-known services that are available to law firms, and the area that has struck me as the one that most law firms FDs were missing out on is banking services.

There are so many services that banks perform that are available at lower rates or better service levels, that it is worth exploring this area further.

Recently, the mainstream banks have started to withdraw Relationship Managers, (RM), from smaller businesses and law firms have suffered in consequence. Trying to resolve a problem has become harder, slower and less satisfactory for the firm. Call centres tend not to understand the central role that law firms provide in the operation of law and the economy, with breakdowns in conveyancing chains due to stuck CHAPs payments being a common example. They are unable to expedite payments selected by the anti-ML AI for checking – often selected because they are “unusually large”: well, blow me down!

The smaller firms in particular – but most firms – tend to assume this is the way the world is and stick with who they have and take all services from them. They don’t know what else is available.

In principle, there are two opportunities. You can divest some of your banking services to an additional bank, or banks, or you can use specialist providers for some aspects of banking.

We are all aware of the introduction of challenger banks. Many of us are approached by them to transfer services to them: and in the days when banks hunted deposits from law firms, they offered great rates. I was always dubious about using them because of SAR compliance difficulties and the need for instant availability: but they usually offered that, albeit at the loss of credit interest. On the plus side, that was one more tranche of money that benefitted from the Financial Services Compensation Scheme’s £85,000 in these uncertain times. So, you took your chance – or you didn’t – and some firms spread their client funds around. This is partly to benefit from reduced bank failure risk and partly in the hope of keeping them onside and providing work to the firm.

Should we look further at using these banks? In my experience, law firms’ banking needs are too complex for one of the smaller banks to be able to fulfil them. I know some will disagree with me on this – and I have not used them all, so I may well have something to learn here - but I have found that smaller banks are less knowledgeable about the needs of law firms and their processes are not sophisticated enough to provide the banking services they need. After all, some of them “sub-contract” their services from their larger cousins. I am, of course, focusing here on firms that hold client money. Those that don’t may well not have these issues.

So, my conclusion about divesting funds to other banks is that it’s a good idea – providing your main bank does not cut their deposit interest rate so as to make it not worthwhile. However, keep your main transactions with one of the big four, (HSBC, RBS/NatWest, Barclays and Lloyds). For the larger firms they should still benefit from having a dedicated RM and some smaller firms may still have someone they can talk to. They may or may not understand the issues facing law firms. If they don’t, it may be worth moving to find a bank that offers that service.

One of the most under-considered areas for most law firms, (and I am thinking here of those who don’t have dedicated Treasury and Forex functions), is the Forex function.

It is difficult to predict the exact date when you will need to buy a foreign currency and the costs of forward contracts are usually prohibitive: but there are platforms available and that I have used that make the task easier and they are cheaper than those offered by the main banks.

For example, a Probate distribution, with proceeds being sent in local currencies to beneficiaries in Canada, (CAD) and the USA, (USD), as well as the UK, (£), can all be managed on one platform. You set up the beneficiaries and the payments in advance on the web-enabled platform – which locks in the forward conversion rate. The CHAPS payment to provide the funds may well be made the same day, or the next day, as soon as you are ready to make that payment. Once the funds are paid over to the platform, they are immediately dispersed according to the pre-set payment instructions.

One big advantage of this approach is that recipients in the same currency, who are entitled to the same percentage, (will subject to any intermediate bank charges), receive exactly the same value in their local currency. There will not be any currency movements between payments and that saves some explaining from disgruntled recipients. There are limits on the sizes of transactions, but these may be varied with the provider. On a recent payment totalling about £360,000, I saved about £400 compared to the standard bank rates. If you make several payments, those savings begin to add up.

Another area that is offered is outsourced Treasury services. This is most useful for those firms with overseas operations but may be applicable for other firms, such as PI and Conveyancing firms, who have large rolling balances of client money. Having advocated spreading cash among several banks earlier in this piece, I know this seems to counter that advice, but it depends on the values held and the sophistication of the firm.

One advantage of using these services is that you benefit from their group buying power but the main benefit is having that service available to a smaller firm that cannot afford to employ a Treasury management specialist.

I have only looked at the “payments, receipts and balances” in this article and there are plenty of opportunities in the borrowing or financing arena, whether for PII or practising certificate loans, VAT funding etc. but it is the basic banking services that I think is under-considered and could usefully be explored further by smaller and medium-sized firms.

Richard Wyatt FCA