Mulcahy: Leading research
The government’s proposed Interest on Lawyers’ Client Accounts (ILCA) scheme will be “an international outlier” if it takes only 75% of the interest from pooled client accounts, rather than all of it, academics have said.
Professor Linda Mulcahy and Dr Matthew Nesvet from Oxford University’s Centre for Socio-Legal Studies also argued that the Ministry of Justice (MoJ) should consider exempting legal aid firms from any scheme.
The MoJ consultation on an ILCA scheme, launched in January this year, has met with strong opposition from the legal profession and been described as a “stealth tax” on consumers.
Last April, Oxford University’s Centre for Socio-Legal Studies began a two-year research project, funded by the Nuffield Foundation, on alternative sources of funding for the free legal sector.
ILCA schemes are one of six being studied, which also include legal expenses insurance, levies on large commercial law firms and a redesign of the apprenticeship levy.
In their response to the consultation, the Oxford academics said: “Given that the interest is accrued on client funds, the general understanding [in other jurisdictions running ILCA schemes] is that this money does not prima facie belong to law firms, though their contractual terms with clients may give them this right.
“This principle is often traced back to a decision of the Judicial Committee of the House of Lords in Brown v Inland Revenue Commissioners [1964]. Given the origin of this rule in the UK’s apex court, it is ironic that England and Wales is one of the few common law jurisdictions not to have an ILCA programme.”
They argued that the proposal was “a reasonable and ethical one if the money can be directed towards the free legal advice sector”.
They added: “At the very least, there is an argument which has received support across jurisdictions, that if the money is generated as a result of transactions in the civil justice system, then consumers using that system should benefit directly from the income generated through ILCA.”
The MoJ proposes taking 75% of the interest generated on pooled accounts and 50% on individual accounts.
The response said this would be “a highly unusual approach” which “detracts from the general principle underlying ILCA programmes” that they recovered all the money earned on pooled accounts, as the amount generated on individual accounts was generally very little.
This meant the proposal relating to individual accounts was “likely to be controversial” and did not rely on the same ethical basis for ILCA schemes – namely that law firms should not be retaining the extra interest generated by pooling client money.
“There are a few exceptions to this. The suggestion that only 75% of interest from pooled accounts is given to the ILCA scheme would also make the proposed English and Welsh scheme an international outlier.
“We understand that this proposal reflects concerns that requiring all interest to be remitted might prompt firms to recover account maintenance and transaction costs from clients when this is currently taken out of retained interest.”
While firms should be able to recover “reasonable” costs from clients which they have incurred as a result of holding their money, the response questioned whether 25% was too much, given that “a number of economies of scale operate in relation to pooled accounts”.
The research to date indicated that the majority of interest earned on pooled client accounts was being retained by solicitors.
“The benefits increase as a result of pooled funds attracting higher rates of interest than individual clients could negotiate. In some instances they can also be invested overnight to generate further income for firms.
“There is a fundamental ethical question at stake about whether law firms should be retaining this money, whether consumers understand the implication of client contract that legitimise this practice, and whether law firms should be in a position to benefit from higher interest rates than their clients could attract.
“Banks also benefit financially from having large pools of money deposited with them and the other accounts that law firms may open with them. A key issue for ILCA schemes across the globe is how the financial benefits they accrue from this income is shared with ILCA programmes.”
The research also found that some solicitors preferred to place money in bank accounts which do not attract any interest for fear of running foul of Solicitors Regulation Authority rules. Any scheme would need to require that lawyers place pooled client funds in an interest-bearing account, they recommended.
On legal aid firms, the academics said: “Since there is widespread concern about the impact of the proposed scheme on legal aid providers it seems essential to consider whether they might be exempted from this scheme.
“To do otherwise would be to undermine a sector of the legal profession which is already financially vulnerable and which serves the most disadvantaged in society.”
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