Whitmarsh: Committee chair
The Ministry of Justice’s (MoJ) plan to use client account interest to fund its work is “nothing more than a stealth tax on legal services”, according to the first public response to its consultation.
Birmingham Law Society (BLS) argued that the administrative costs of the Interest on Lawyers’ Client Account (ILCA) scheme would make legal services more expensive and likely reduce access to justice.
Under the proposals, the MoJ 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. The immediate response was very negative.
The consultation closes on 9 February, only 33 days after it opened, and BLS’s professional regulation committee has already issued its response, repeatedly branding the scheme a stealth tax and rejecting “any justification” for the rates proposed. “[They] are far higher than rates for income tax, or corporation tax.”
It warned that “the increased cost for those needing access to legal services may drive them to use unregulated legal service businesses that do not provide the protections available from regulated law firms.
“International clients faced with the increased costs of doing business in England & Wales may consider alternative jurisdictions, particularly for cross-border litigation, where the cost of doing business is more attractive.”
Meanwhile, those who have been awarded a lifetime care settlement following a catastrophic personal injury would suffer injustice as their law firms would have to account for 50% of the interest earned on their money.
The committee – chaired by Cary Whitmarsh, head of compliance at Trowers & Hamlin – highlighted practical difficulties, such as around the ILCA scheme applying only to reserved legal activities.
This would be a regulatory burden on law firms, it explained: “For example, the consultation document mentions ‘in probate and estate administration, firms may temporarily hold funds from a deceased person’s estate before distributing them to beneficiaries’.
“The only reserved legal activity involved in this process is the application for grant of probate or letters of administration. The rest of the estate administration work is not a reserved legal activity.
“Firms will need to hold the estate administration funds separately from the funds for the application to the Probate Registry. The interest earned on the funds for the application will be relatively small in comparison to the interest earned on the deceased’s estate.”
The response said interest on clients’ own accounts that solicitors were appointed to operate – such as under a lasting power of attorney – should not be within the scope of the ILCA scheme, “as this would amount to a tax on those who are the most vulnerable in society”.
BLS suggested the MoJ had not understand that interest earned on pooled client accounts was not client money as defined by the accounts rules – rather, it belonged to the firm.
It added that one way for law firms to claw back the cost of administering the scheme would be to raise the de minimis limit before a firm accounted to the client for a fair sum of interest, from the tens of pounds that most currently adopt to hundreds of pounds.
