Fowler: Idea has potential
The government’s plans for an Interest on Lawyers’ Client Accounts (ILCA) scheme are so poorly thought-through that implementing it might not be lawful, City solicitors have warned.
The Association of Personal Injury Lawyers (APIL), meanwhile, described it as “a stealth tax on the general public seeking legal advice”.
A slew of largely negative responses to the consultation were published yesterday, to mark the extended closing date, several having come out last month ahead of the original date.
The ILCA scheme would transfer 75% of the interest generated on pooled client accounts and 50% on individual client accounts into the MoJ’s budget.
In its response, the City of London Law Society (CLLS) questioned the implication that interest was unearned income.
“One possibility is that interest-based income is being used by firms to subsidise the low market price for residential conveyancing.
“Removing that source of income will inevitably cause disruption to the legal services market as it currently operates and is likely to undermine the benefits this market provides to the economy and government revenue.”
The response pointed out that around half of the proposed money raised was already paid to the Treasury through the taxation of law firm partners’ income.
Other concerns were how an ILCA scheme may affect the MoJ’s budget – especially given fluctuations in the base rate of interest – how it would remove any incentive to earn interest on client money, and how this “additional tax” would be imposed on only part of the legal profession.
It went on: “At this risk of stating the obvious these clients will be taxed on interest earned on their own money above and beyond the general tax system simply for using a regulated law firm. This makes no sense and causes the CLLS great concern.”
The MoJ would also become “a stakeholder in the existing regulatory arrangements”, so that it may oppose Solicitors Regulation Authority ambitions to do away with client account “irrespective of where the public interest lies”.
“In any event, if the SRA’s direction of travel with regard to eliminating client accounts is to succeed a profitable group of third party managed fund providers will need to be created to fill the gap left by law firms. Taxing them in the manner suggested will inhibit that development.”
The CLLS criticised the absence of any modelling of the impact on the legal market, with stress testing that has been done by others suggesting that, even if firms did not become insolvent as a result, it would significantly depress law firm profits and in turn “trigger a chain of events that will lead to the insolvency of a number of law firms”.
Lost government revenue as a result “is likely to exceed any additional net income the MoJ may gain from the scheme”.
“It follows that the proposals in their current form are inadequately considered to the point where it is questionable that a decision to implement the scheme could be lawful,” the CLLS said.
John McQuater, executive committee member at APIL, said: “It’s wrong to assume this is somehow ‘free money’. The MoJ taking a share of generated interest would amount to a stealth tax on the general public seeking legal advice, including vulnerable victims of negligence seeking redress.
“The proposed scheme could have serious implications for law firms, especially smaller ones, which use any retained interest from client accounts to, for example, offset overdraft charges and provide funding models that are more beneficial to clients.”
APIL said that, from a personal injury perspective, interest was either paid to the client or retained to contribute towards costs that otherwise the client would need to pay.
Mr McQuater added: “There does not appear to be any commitment by the MoJ, if the proposal went ahead, to use funds raised in a way that would benefit those relying on the civil justice system.”
Surrey Law Society said members considered the scheme to be “fundamentally flawed, disproportionate and unsupported by robust evidence”.
They had raised “serious concerns” about the “increased administrative and compliance burden, additional cost and risk for firms, and the diversion of client money in a manner that conflicts with established regulatory principles”.
Members highlighted “the complexity of calculating and allocating interest across multiple parties, including determining the portion payable to the scheme, the portion subject to existing regulatory requirements, and the amount due to individual clients”.
This was seen as “requiring additional systems, processes and reconciliation work, significantly increasing administrative burden”.
The society added: “There was particular concern about the impact on small and medium-sized firms, which may lack the resources or staffing capacity to manage this additional complexity in a proportionate way.
“Members noted that the cumulative compliance burden could threaten the viability of some practices.”
In its response, CILEX noted that the legal sector already made a significant contribution to the running of justice via the funding of its own regulatory system – and billions in tax.
ILCA “represents a further tax and compliance burden which could adversely affect the sector’s contribution to UK plc” – and could well be passed on to consumers.
The proposals, CILEX argued, did not demonstrate any consideration of the operation of similar schemes in other jurisdictions, nor reference ongoing research by the Centre of Socio Legal Studies at Oxford University which suggested central governments themselves generally do not run such schemes.
Whilst an ILCA scheme may have potential, with the MoJ not providing a detailed impact assessment, the risk to vulnerable parts of the sector is unknown, it went on, while it also did not explain how it would run a potentially complex operation, with fluctuating income levels.
Sara Fowler, president of CILEX, commented: “Our underfunded justice system is in desperate need and the use of client money interest to fund it is an idea that has potential, provided the impact and practical administration of the scheme is properly thought through.
“We urge the government to step back and thoroughly assess how such a scheme would operate as well as providing greater clarity on the level of funds likely to be raised and the extent to which they would have measurable, positive benefits for justice.”
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