New York: Every US state has an ILCA scheme
Interest on Lawyers’ Client Account (ILCA) schemes around the world do not go into general government coffers, as the Ministry of Justice (MoJ) is proposing, according to research.
The Centre for Socio-Legal Studies at Oxford University also observed that criticism aimed at lawyers for benefitting from client account interest rarely extended to banks, even though they “also benefit from these large accumulated funds”.
The MoJ this week revealed plans to introduce an ILCA scheme that would claim 75% of the interest generated on pooled client accounts and 50% on individual client accounts.
Arguably the most surprising aspect was that the money would go into the MoJ’s general budget – much of which is spent on prisons – rather than specific access to justice activities.
The Centre for Socio-Legal Studies is running a project – together with the Access to Justice Foundation and Surrey University – exploring new funding streams for the not-for-profit legal advice sector.
This includes interest on client accounts and the centre has submitted findings to the House of Commons’ justice select committee to inform its current access to justice inquiry.
It found there are currently 78 ILCA-style programmes worldwide – in the 50 states of the US plus the District of Columbia, Puerto Rico, and the Virgin Islands; Canada’s 10 provinces and three territories; the eight states of Australia; and New Zealand, South Africa, Namibia and France.
The paper said the schemes were generally administered by professional bodies, such as a law society or bar association, or a private not-for-profit foundation; in the US, some were run by a section of the state supreme court.
It went on: “ILCA schemes fund a range of activities which vary across jurisdiction. These include grants to organisations giving free legal advice, public legal education programmes, open access law libraries, widening participation initiatives for law students, professional development programmes.
“In some jurisdictions a significant proportion of funds are mandated to be given to, or voluntarily assigned to legal aid programmes. Indeed, it is a major finding of this study that support for legal aid programme is a top priority of many of the schemes examined.”
The MoJ consultation said 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.”
The Centre for Socio-Legal Studies also analysed 214 law firms’ client interest policies and found they commonly placed three hurdles in the way of clients recovering interest: thresholds (given the cost of calculating and administering any reimbursement), exclusions and “top slicing”, that is, law firms benefitting from the higher rates of interest available on pooled funds.
“As a result of these practices clients rarely receive any interest on funds held in a general client account. Instead this interest is retained by law firms and treated as an income stream.
“In addition, there is evidence that some firms are investing a portion of funds in general client account in short term liquid investments to generate additional sources of income.
“There is no doubt that there is significant money to be made from the practice of pooling funds.”
Banks were also “major beneficiaries, aiming to make money from pooled funds whether or not they pass some of the benefit on to solicitors through favourable interest rates”, the authors noted.
“It is significant that debate to date has sometimes been critical of legal practitioners accruing benefit from client interest but rarely critical of the banks that also benefit from these a large accumulated funds.
“ILCA schemes offer the possibility of re-directing the money made from pooled funds to purposes which serve the public interest and have the potential to significantly benefit the not-for-profit advice sector at no additional cost to the public purse.”
A scheme also offered the legal profession “an opportunity to respond to concerns raised by the Solicitors Regulation Authority that some law firms have become overly reliant on client interest as a source of income in ways that could impact on public confidence in the profession”.
The paper identified a number of challenges with ILCA schemes as well. “The bulk of interest they rely on is generated by property transaction meaning that income can reduce significantly during a property slump…
“This can create barriers to sustainable funding programmes. In order to manage this problem schemes develop a reserves policy and also retain a portion of income for investment purposes in order to level out fluctuating income streams.
“Even with these measures in place data generated by the schemes tend to suggest that funds available for distribution fluctuate considerably.”
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