McCluskey: Will banks still lend in the same way without interest income?
Banks will cut the interest they pay on law firms’ client accounts from up to 3.75% to 1% if the government goes ahead with its plan to take most of the money, the former UK head of professional practices at Lloyds Bank has predicted.
Paul McCluskey, now managing director of law firm adviser Gemstone Legal, said the knock-on effects of the government’s interest on lawyers’ client accounts (ILCA) scheme could be reluctance by banks to give law firms overdrafts and by indemnity insurers to cover them.
Mr McCluskey said loss of client interest income would make law firms “rethink how they run as a business”.
Speaking at the Institute of Chartered Accountants in England and Wales (ICAEW) Solicitors Conference 2026, Mr McCluskey said some law firms generated more than £1m a year through client account interest, while others only a few thousand pounds, depending on what kind of work they did.
If the Ministry of Justice went ahead with its plan, outlined in January this year, to transfer to itself 75% of the interest on pooled client accounts and 50% on individual accounts, Mr McCluskey said that law firm stakeholders might have to put more capital into their firms.
“They have to replace that income in some way. Maybe that’s just about increasing fees. In extreme circumstances it will lead to redundancies, and perhaps even closure, which no-one wants to see.”
If banks cut the interest they paid on pooled law firm client accounts from 3.5% or 3.75% to the standard rate of around 1% as a result of ILCA, the impact could go further than loss of revenue.
“If the income from law firms is eroded, will banks still lend to them in the same way? If that income is no longer there, why would the banks continue to offer the sizeable overdrafts that they do?”
Further, if law firms were “stressed financially in any way”, would they still be offered indemnity insurance?
Mr McCluskey wondered how many law firms would report their financial problems to the SRA. “Almost none, I’m guessing.”
A snap poll of the audience at the conference, which was online, found that six out of 10 accountants had taken part in conversations with law firms about the impact of ILCA.
A second poll showed that one in seven (16%) believed that, without client account interest, more than 60% of firms would struggle financially, while a further 42% said the proportion would be anywhere from 30% to 60%.
Laurence Potter, chief compliance officer at Shieldpay, which provides third-party managed accounts (TPMAs) to law firms, said the ILCA scheme had increased the number of law firms, including bigger firms, which were talking it about TPMAs.
Mr Potter said law firms were questioning why, if they were not going to earn interest from client accounts, they should put up with the “regulatory hassle” of managing them.
TPMAs were currently included in the government ILCA scheme, which would have “unintended consequences that needed to be worked through”.
Mr McCluskey added that all accountants should be having conversations with law firms about their options if ILCA went through, and his message to law firms was: “Make hay while the sun shines.”
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