Evans: Government does not understand impact on firms
The government’s proposed raid on client account interest “will put high street law firms at risk and force legal fees to rise for those that survive”, the Law Society has warned.
As we reported yesterday, the Ministry of Justice (MoJ) has issued a consultation on an Interest on Lawyers’ Client Account (ILCA) scheme.
This would claim 75% of the interest generated on pooled client accounts and 50% on individual client accounts, with the money going to the MoJ’s general budget rather than specific access to justice activities, as happens in other countries.
Law Society president Mark Evans condemned the move, saying the consultation showed the MoJ “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”.
He explained: “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.”
Victoria Morrision-Hughes, vice-chair of the Association of Costs Lawyers, added: “Costs Lawyers may sometimes have to hold client money simply to ensure that funds are available for payment of both disbursements and their own fees.
“This is not a money-making exercise – simply a way to ensure that work is done smoothly and efficiently. The Ministry of Justice must ensure the new scheme does not disadvantage the firms that do this.”
According to research commissioned by the MoJ and produced in June 2024 – but only published yesterday alongside the consultation – 92% of 604 legal service providers said they were not reliant on client account interest for the sustainability of their business, while 94% said losing it would have little or no impact on them.
Later in 2024, however, the Solicitors Regulation Authority expressed concern about firms being financially over-reliant on client account interest.
Last March, a report from the Law Society’s leadership and management section said almost all of the 21% increase in profits per partner seen by SME law firms in 2024 came from client account interest and they needed to “wean themselves off” it.
Meanwhile, according to NatWest’s annual legal report in October, interest represented a median 5.6% of firms’ earned income, although for the upper quartile of firms it started at 9.5%.
This meant that a median of 21% of profits per equity partner came from interest profits. But for a quarter of firms, it started at 35%. At the same time, there was evidence that exposure of law firms to interest income had reduced compared to the previous year.
Writing on LinkedIn yesterday, the report’s author, Andrew Allen, a partner and head of PKF Francis Clark’s national legal sector team, said: “Still digesting but I am struggling to conclude anything other than [this being] a further backdoor tax increase which will fuel inflation.”
The MoJ research, conducted by Pye Tait Consulting, comprised 551 solicitor firms and 53 licensed conveyancer practices.
It found that a third always fully remitted interest from general client accounts to their clients, while 53% did so partially/sometimes. Only 4% used the money retained for pro bono or charitable purposes.
Researchers concluded: “Law firms in England and Wales are generally committed to remitting interest from general client accounts to their clients, although there are wide variations between firms in how much is paid back and how that amount is determined.”
While lawyers generally thought clients did not expect to receive interest, Pye Tait said there needed to be research among consumers on this.
“For instance, many clients may not think about or prioritise recouping interest on monies held in firms’ client accounts, especially where they are principally focused on their main legal objective such as a property purchase, or where money is only held for a short time.
“Furthermore, it highly likely that clients (not consulted within the scope of this research) simply place trust in law firms to look after their interests appropriately.
“An additional consideration is that clients potentially lack upfront information about law firms’ interest policy. Whilst 95% of firms have an official policy in place regarding payment of interest on general client accounts, only 6% publish this information on their website.”
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