The government has set out proposals to use interest on lawyers’ client accounts as “a crucial source of funding” to support and enhance services in the justice system. Funds would be directed to “areas of greatest need”, the Ministry of Justice said in a statement.
The Interest on Lawyers’ Clients Accounts Scheme (ILCA) will see a proportion of the interest earned on client accounts in England and Wales, including third party managed accounts, remitted to the government. Firms would retain a portion of the remaining interest, which would continue to be subject to existing sectoral rules on client interest.
The Ministry of Justice said it is also considering whether individual client accounts should be included within the scope of the scheme, “to avoid creating a loophole”.
A consultation has been launched which sets out the proposals in detail, and the government is seeking views from legal service providers and practitioners, regulators, professional bodies, clients and consumer groups, the banking sector and companies providing client money accounts or third party managed accounts for legal firms, advice organisations, and “all those with an interest in the proposal”.
Writing in the foreword to the consultation document, David Lammy, the secretary of state for justice, said law firms should contribute to strengthening justice.
He added:
“We are carrying out this consultation to understand how the legal profession can support our shared goal: a justice system that is fair, accessible and fit for purpose.
“Currently, many firms retain interest generated on client accounts as income. We believe that unearned income could be better invested in strengthening our justice system. This is a tried and tested idea, with similar schemes operating successfully for decades in countries like the United States, Canada, Australia, and France. These models have delivered measurable impact by funding access to justice and legal aid services.”
Under the proposals, law firms would be required to hold client money in accounts that meet stipulations set out under the scheme, managed by a scheme administrator, which the government proposes should be the Ministry of Justice. “Delivering the scheme ‘in-house’ ensures timely implementation and minimises unnecessary complexity and cost to the public purse,” the consultation document explains.
Requirements for firms include periodically collecting appropriate interest from the client account to send to the scheme administrator, calculating interest daily and crediting it to the account periodically, and offering a rate of interest comparable to other interest-bearing banks.
The legal service provider will be required to provide account information to the scheme administrator as required for enforcement activities, and the client account may be required to be held with a provider that is able to host an administrator account within the same bank or institution.
Sanctions would be introduced for providers that do not adhere to the scheme’s requirements.
All legal service providers in England and Wales who are regulated under the Legal Services Act 2007 and hold funds in client accounts would fall within scope of the scheme, irrespective of legal structure.
The Law Society of England and Wales was quick to condemn the plans, warning that the “raid on client accounts” will lead to increased fees and force some firms to close.
“The MoJ has decided to take money from the interest earned on law firms’ client accounts to boost its own budget,” Law Society president Mark Evans said.
“Yet, as its own consultation reveals, it has no clear idea how this proposal will work in practice and no understanding of the serious consequences this will have on high street firms and access to justice throughout England and Wales.
“Firms will close, fees will rise and clients will be impacted if the MoJ goes ahead with the proposal.
“The cost of doing business in the legal sector is already high, with recent rises to National Insurance contributions meaning businesses are paying more. The proposal comes at a time when small firms will have to manage new regulatory burdens on anti-money laundering supervision and tax adviser registration. High street law firms will face a perfect storm of new bureaucracy, undermining the UK government’s efforts to achieve growth and revitalise local economies.
“Despite the short timeframe for the consultation and the MoJ’s efforts to keep the proposal under the radar, the Law Society will be consulting widely with its members across the country.”
The consultation is open until 9 February.
Open consultation: Interest on Lawyers’ Client Accounts Scheme
