Two identical bills are working through the Florida Legislature to address an obscure rule change that governs how much interest banks pay on specific trust accounts held by lawyers.
Notably the changes — which have pitted the Florida Bankers Association against the Florida Bar — could also affect how much money is generated to help fund legal aid organizations statewide.
The bills — HB 1253 and SB 1336 — call for the state’s chief financial officer to set the interest rate that banks pay on IOTA —Interest on Trust Accounts — program accounts on a quarterly basis, capping what banks have to pay at 2.55%.
The legislation was filed by two Vero Beach legislators in response to a Florida Supreme Court rule passed last year that changed the minimum banks must pay on those IOTA accounts and tied the rate to an indexed rate of between 3.25% and 4.99%.
Many bankers in the region and state say the Supreme Court's rule change is forcing them to pay higher transaction accounts nearly the same for what they normally pay on long-term deposit accounts. That in turn, is costing banks more and cutting into their bottom lines. The Florida Bar, however, argues the new rules give banks an incentive to bring in more business by offering higher yields. The Bar also argues the change brings more money for the legal assistance.
(Not all lawyers agree with the Bar's position, as some, in Sarasota and Tallahassee, have signed on to letters and statements in support of the bankers' position. On the flip side, a banker, Jody Hudgins, who held executive posts for institutions in Naples and Sarasota over a 40-year career, wrote the rule changes for the Bar.)
Florida’s CFO Jimmy Patronis has sided with the bankers, writing in a letter to the Supreme Court justices that he fears given the new rules, “banks will either abandon this important market segment or pass along fees to their attorney-customers who require IOTA services.”
“Ultimately, these increased costs will be passed along to Florida consumers,” he writes.
While a disagreement over an arcane rule may seem like just a fight between lawyers and bankers over a few dollars of interest, the discussion has a much deeper impact given the funds generated from these accounts are part of a program that helps fund legal aid organizations for low-income residents in the state.
According to Funding Florida Legal Aid (formerly The Florida Bar Foundation), the state Supreme Court requires that all nominal or short-term funds belonging to clients or third persons be deposited into interest-bearing checking accounts. But the interest earned cannot be deposited back into the accounts. Instead, the funds go to FFLA to be distributed, in large part, to provide legal assistance for the poor.
The court implemented the program in 1981.
According to FFLA, it collected $45.5 million from the IOTA program during fiscal year 2022-2023 and in December the organization’s board approved $33.8 million in IOTA funds for 35 legal aid organizations as well as monies for other programs.
The IOTA money is earmarked for Florida residents who are at or below 125% of the poverty level.
It is important to note that Patronis, legislators and the bankers are not advocating money be stripped or diverted from the legal programs. Instead, they argue the way the Supreme Court rule directs them to calculate the interest paid on the IOTA accounts needs to change.
The reason for this is largely due to the fact of how the IOTA accounts work, says Dennis Murphy, president and CEO of Gulfside Bank in Sarasota.
The IOTA accounts are like checking accounts and as such generate a lot of transactions, unlike money market or savings accounts, which usually remain stable, while growing, over a long period.
Murphy points to a real estate attorney with an IOTA account at the bank as an example. This attorney had more than 1,100 wire transfers and 900 checks processed through the bank last month. Given the volume, the bank had to dedicate time to it as well as provide traditional services including ACH transactions and fraud prevention measures. And the client he refers to was not charged.
That is by nature a checking account, he says.
But with the Supreme Court’s rule change, the interest the bank has to pay on the account is “what we pay for high yield money market accounts.”
“So, you've got this mismatch between what they're requiring that we pay and how the accounts actually function,” Murphy says. “What’s happened is it's resulted in an increase of 1,000%, literally 10 times, in the rates that have been paid. And that's a function that's not practical or sustainable.”
While the Supreme Court is reconsidering the rule, bankers say the proposed legislation would also allow for comparability to return to the process. This means banks would treat IOTA accounts as favorably as any other account with similar characteristics. As such, a bank would pay the same interest on an IOTA account as it would on a checking account.
It, says Murphy, “is critical for banks to continue to be able to offer these services at a reasonable cost to the law firms.
“We’ve got to be able to treat an IOTA account like a checking account and not like a money market or else the whole paradigm and the equilibrium that we have, the pricing structure with our law firms, has to change.”
The Florida Bar officially voted to oppose the legislation Jan. 19.
And that’s not surprising. Legal representation can be expensive. Cleo, a technology company for attorneys, reports that lawyers in Florida charge between $100 and $633 per hour, with the average being $297.
Murray Silverstein, FFLA’s board president, said in a December statement that the IOTA money enables “qualified legal aid providers to serve more clients, pay their legal aid staff salaries commensurate with their experience and increase the availability of pro bono lawyers.”
In a report filed to the Supreme Court in October, the Bar wrote that in June banks remitted more than $15 million to FFLA. That was money collected in the two weeks after the rule went into effect May 15. According to the Bar, despite it only being two weeks, that totaled 31.6% of remittances for the entirety of fiscal year 2022-2023.
In July, over $23 million was remitted and just under $23 million came in in August.
“To put this in perspective, in 2 ½ months under the new rule, the remittances are at approximately $61 million to assist the ultimate beneficiaries of IOTA funds: indigent Florida citizens in need of legal representation,” the Bar says in the report.
As for how the new rule will change banks’ approach to IOTA accounts, despite threats of mass defections the report’s authors says it saw little change.
The report says there were 161 banks holding IOTA accounts when the rule went into effect. Of those, three banks stopped offering the accounts and one said it intended to stop in the next month. The four had a combined $880,572.01 in IOTA funds, about 0.1% of all the money held, the report stated.
While four banks withdrew, the report says two others enrolled with FFLA and a third has enquired about starting to offer IOTA accounts. And a Clearwater bank already offering IOTA accounts says it will begin offering more of them.
It's unclear if that will change based on the outcome of the pending legislation. While the difference in how much interest is paid now and what will if the bills pass may seem minimal, when you are talking millions of dollars it is likely to add up quickly.