Some law firms have embraced financial services head on and applied to the Bank of England to become licensed deposit-takers.

One such firm is Batten & Co, a 300-year-old family practice based in Yeovil, Somerset, which specialises in private client and commercial work.

The firm itself does not have a deposit-taking licence. The licence belongs to a separate business called Dryfield Trust, which was set up for the purpose about 15 years ago. It is now an authorised institution with the Bank of England.

Graham Hughes, senior partner at Battens, says: “Historically, private practice was about matching a client who had money with one who did not. The amounts were fairly modest in those days. But by the late 1970s and early 1980s, things became increasingly difficult. You started having to find three clients with money to lend to one without. It was an administrative burden. We decided it would be prudent to pool the money which would simplify lending. We now have about £10 million deposited with us.

“We offer everything from Tessas to monthly income accounts, and lend money secured on property. Our knowledge of the local property market is based on over 250 years' of knowledge. The vast majority of our banking clients have never come to us for legal advice.”

Dryfield Trust has attracted clients through word of mouth, advertising, and has appeared in Which? magazine. It currently offers one of the best Tessa rates available. One advantage is that very rapid decisions can be taken on the lending side, whereas banks and building societies might well have to refer the decision to a credit committee.

To Hughes' knowledge, at least two other firms have set up deposit-taking arms. The success of one institution led it to break away completely from its parent law firm.

But Hughes warns: “We think the good name of solicitors assisted us in our application, but any firm that wanted to do a similar thing today has probably missed the boat.

“When we did it, we had to put up £250,000 of our own assets, and the figure is substantially more now. For obvious reasons of regulation, the Bank of England is not that keen on lots of small institutions setting up.

“We are heavily regulated by the Law Society, but then we are dealing with other people's money so we need to be. I see it as a good opportunity for us to steal a march over the other less-regulated sectors.

“What the regulations do is frighten off those people who only want to dabble, which is no bad thing. You shouldn't be allowed to carry on financial services business on a wing and a prayer.”