Posted by Jess Irwin, senior consultant, and Jen Dunlop, managing director, of Legal Futures Associate Compliance Office [1]
Jen Dunlop
The Ministry of Justice’s (MoJ) consultation on an Interest on Lawyers’ Client Accounts (ILCA) scheme [2] is being framed as a sensible, international, “tried and tested” way for the profession to help fund a justice system under strain.
That framing is politically neat but also incomplete.
Because this is not a technical tweak to how interest is calculated. It is a redefinition of what client account interest is for, who it belongs to, and what behaviour the government can reasonably expect from law firms in return for holding client money on trust.
If we get that wrong, we do not simply change a revenue line – we corrode confidence in how client money is safeguarded, we potentially raise the cost of legal services for consumers, and we pile yet another layer of administrative complexity onto firms already operating under intense regulatory pressure.
What is being proposed
The consultation [3] (published 7 January 2026) proposes that the government take a percentage of the interest generated on client accounts, including third-party managed accounts (TPMAs).
The headline numbers matter:
- Pooled client accounts: the government would take 75% of the interest, with the consultation explicitly asking whether it should be 90% or even 100%.
- Individual (named) client accounts: the government would take 50% of the interest.
- Scope: the scheme would apply to client funds connected to reserved legal activities, while seeking views on whether it should move beyond that.
- No ringfencing (for now): the MoJ says it does not propose designating income for specific access to justice projects at this stage, preferring flexibility to direct funds “to the areas of greatest need” within the justice system.
- Deadline: responses are due by 9 March 2026 (it was extended this week from 9 February).
The Law Society’s initial response [4] has been blunt: it warns of firm closures, rising fees, and knock-on harm to access to justice.
The difficult reality: this is a trust issue, not an interest issue
It is tempting to treat client account interest as ‘free’ money. The consultation itself describes it as “unearned income”.
But the profession’s duties around client money were not designed around the idea that law firms should subsidise public spending via the mechanics of trust accounting.
Under the SRA Accounts Rules, firms must account to clients or third parties for a “fair sum” of interest, unless an informed alternative arrangement is agreed. And the Solicitors Regulation Authority (SRA) has previously acknowledged a reality many firms live with every day: cumulatively, interest is often used to offset the banking and account charges for holding client funds.
So the question is not, should firms contribute more? It is, should the government be able to redefine a component of client money handling as a general revenue stream, without changing the underlying trust and regulatory obligations that made that system workable in the first place?
If the answer is yes, then we should at least be honest about what follows: clients will pay, either directly through higher fees and new charges, or indirectly through reduced choice as smaller firms struggle.
Use of the money may backfire
ILCA models elsewhere often link interest capture to access to justice spending. The MoJ references international schemes and the impacts they have delivered.
But in England and Wales, the MoJ position (at least initially) is explicitly not to earmark the money for access to justice. That matters because it changes how the profession and the public should evaluate the trade-off.
If the outcome is simply a bigger central budget for the MoJ, the profession is entitled to ask two questions:
- What assurance is there that this will not become a substitute for sustained, transparent funding decisions, including for legal aid?
- If the money is not ringfenced, what stops it from being absorbed into the system with no measurable improvement for the people most excluded from justice today?
The consultation’s strongest stated objective is to support an “effective justice system”. That is an aim everyone shares. But the mechanism is blunt, and blunt instruments have side effects.
The operational problems are not a footnote
The consultation acknowledges additional administrative costs and proposes monitoring requirements that will require firms to provide account information to the scheme administrator.
That is where the real-world compliance pain lands.
Confidentiality and commercial sensitivity
Client accounts are not generic banking products. Transaction patterns, matter types and timings can be inferred from account movements, even if names are not disclosed. The Law Society has already flagged concerns about confidentiality and commercial confidentiality in relation to information sharing with an MoJ administrator.
Reserved versus non-reserved work is not a clean line
The consultation proposes limiting the scope to reserved activities but asks whether it should be extended beyond them. On paper, that sounds tidy. In practice, firms are already dealing with complexity around what counts as reserved work and how it is delivered, highlighted recently by the attention on the decision in Mazur and the sector-wide debate it triggered.
Adding a funding scheme that treats scope classification as a financial boundary invites disputes, inconsistent application and higher costs.
TPMAs are pulled into the scheme too
The MoJ is clear that arrangements involving TPMAs are in scope. That introduces an extra layer of coordination across FCA-regulated providers, contract terms that often allocate interest in different ways, and client communication obligations that will not be trivial to standardise.
If the government wants this to work, it needs to earn it
If the MoJ is genuinely committed to a sustainable, fair scheme, it needs to move beyond the ‘law firms can afford it’ logic and design it around outcomes, not optics.
Here are the design principles that would make any ILCA proposal more defensible:
- Ringfence at least a meaningful proportion for access to justice, with transparent governance and reporting. If the justification is access to justice, prove it.
- Protect vulnerable client categories explicitly. The Law Society has warned about the impact on damages (for example, for critically injured clients) and other client groups who rely on the interest in individual accounts.
- Do not create a compliance trap between reserved and non-reserved legal activities. If scope is essential, define it in a way that firms can operationalise without turning every matter-opening decision into a funding classification exercise.
- Acknowledge that firms will pass on costs. The consultation itself recognises the risk that taking all interest could push firms to recover account maintenance and transaction costs from clients. That risk does not disappear at 75%.
- Give the sector time. A scheme that touches banking products, client communications, regulator alignment and reporting requirements cannot be responsibly implemented on a rushed timetable without errors and unintended harm.
- Think about unintended consequences. Will banks continue to offer competitive interest rates on pooled client accounts if there is less incentive for law firms to seek to negotiate them? If the answer is no, could this be an expensive exercise in going after ‘rich’ lawyers only for the MoJ to end up back at square one?
The most important thing firms can do now: respond with evidence
The consultation closes on 9 March [5]. This is a short runway for a proposal that might transform how many firms fund key operations, price services, and manage client money risk.
Whilst generic (anonymised) opinion has its place, what is likely to make more of a difference in this consultation is evidence: how interest is used in practice, where it subsidises banking costs, where it supports legal aid and pro bono work indirectly, what operational burdens will arise, and which client groups will be harmed.
If this becomes law, it will not land on the legal sector as a single entity; it will land on the high street first and on clients with the fewest alternatives.
The justice system needs sustainable funding. But if we start treating client money infrastructure as a fiscal plug, we should not be surprised when confidence, affordability and access to legal services deteriorate further.