MoJ: Money would go into central funds
The Ministry of Justice (MoJ) has today unveiled plans for an Interest on Lawyers’ Client Account (ILCA) scheme, which would claim 75% of the interest on pooled client accounts to boost its budget.
The proportion would be 50% on individual client accounts, as these are generally set up for larger sums. Third-party managed accounts would be caught too.
Though similar schemes elsewhere in the world generally direct the money towards supporting legal aid and free legal services, as well as legal research and education, here the MoJ is proposing that the money simply go into its central funds.
A consultation issued today said: “This is because core justice services in England and Wales require sustained investment across multiple areas.
“Given this context, earmarking ILCA income for narrow purposes to begin with could limit its beneficial impact. Instead, the funds can be directed to the areas of greatest need within the justice system.”
Describing client account interest as “unearned income”, Lord Chancellor and Deputy Prime Minister David Lammy said that, as law firms benefitted from a strong justice system, “so it follows that they should contribute to strengthening justice”.
Legal Futures first revealed in May 2024 that the MoJ had commissioned research into the possibility of claiming client account interest.
It said today that a 2024 survey of 604 legal service providers found that 92% were not reliant on client account interest for the sustainability of their business, while 94% said losing the interest would have little or no impact on them.
A third of providers always remitted all interest from pooled client accounts, 53% partially or sometimes – 23% used interest to cover costs. Over half (55%) set a de minimis threshold above which they returned interest to clients – on average £20.
“Providers reported a general sense that clients for the most part did not expect to receive any interest back, often due to short-term holding of funds,” the MoJ noted.
Client funds in relation to all the reserved legal activities would be in scope of the scheme but the consultation asked whether any other services undertaken by legal service providers involving client money should also be included.
“Furthermore, we recognise that there are many reasons why clients may have an individual named account set up on their behalf, and welcome views on whether there are cases where such accounts should be out of scope.”
It said the 75% figure struck a balance between generating “meaningful revenue for the benefit of the justice system and leaving a sufficient percentage of interest, which can be returned to clients where applicable”.
Recognising that individual accounts “are often used for larger, longer-term work, such as for probate, property, or corporate transactions, which can generate more interest for clients”, and that the administrative costs for firms were higher, the 50% rate “should provide for a fair contribution to the scheme while reducing incentives for firms to redirect client funds to individual accounts to minimise participation in the scheme”.
Remaining interest would still be subject to the rules already imposed by firms’ regulators. Sanctions for firms not complying with the scheme rules will be set out at a later date.
The MoJ said it had considered a model where interest below a certain threshold would be remitted to the scheme, while clients would receive a proportion of any interest above it, but decided against it because of the administrative burden and complexity.
The MoJ would administer the scheme. Legal service providers would have to meet its core requirements, which would include only using client accounts that provide certain features.
The client account used would have to calculate interest daily and credit it to the account periodically, and the interest would be sent periodically – the frequency has still to be determined – to the MoJ.
The account would have to offer a rate of interest comparable to other interest-bearing accounts the bank offered, “with similar balances, risks, and features”.
The MoJ has not decided how best to collect the interest, seeking views from client account providers on whether they could automate the process.
It said it would not require these providers to offer compliant accounts but expected that “the market would develop and offer these products to compete for legal sector business”.
The MoJ was warned last year about the potential impact of an ILCA scheme on legal aid firms – with providers saying they relied on the interest and income from private work to cross-subsidise their legal aid services – and the consultation asked for more evidence on this.
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