MoJ: Looking at implications of IOLTA scheme on law firms
The Ministry of Justice (MoJ) is formally looking at whether interest on some client accounts could be diverted to fund legal services for people unable to afford advice, Legal Futures can reveal.
It has commissioned research firm Pye Tait to understand law firms’ practices on interest accrued on general client accounts – that is, where monies are held for more than one client on a pooled basis – to inform its thinking about whether a US-style ‘IOLTA’ scheme might be appropriate.
IOLTA – which stands for interest on lawyers’ trust accounts – is a method of raising money for charitable purposes, primarily civil legal services for indigent people.
It is limited to client money that is pooled because it is either a small amount or only held for a short period of time, and cannot earn interest for the client in excess of the costs incurred to collect that interest.
Since being allowed in the US in 1981 – Australia and Canada have had similar schemes in place since before then – IOLTA has generated over $4bn in revenue.
The MoJ said the aim of the research was to help it “build a picture of how reliant law firms are on the interest for their own purposes, and what steps, if any, are being taken to use interest to fund free or related services, or any charitable activities”.
It continued: “The research will help the ministry to consider whether an IOLTA-style scheme might be appropriate in the future.
“Although the ministry does not hold a view on this, it is important to understand the potential implications for law firms of changing the existing framework governing how client money is handled; also to ensure that is adequately factored into the ministry’s considerations when exploring different policy options.”
In 2011, in response to a legal aid consultation, the MoJ rejected adopting IOLTA schemes and did so again in 2014 in response to a recommendation of the independent Low Commission.
The rise in interest rates since the mini-Budget in 2022 has made client account interest a significant source of income for law firms once again.
The Law Society’s recent financial benchmarking survey said that total net interest income across the 147 firms surveyed, more than two-thirds of which had turnovers of under £10m, rose from £2.6m in 2022 to £27.5m in 2023.
In response, the Solicitors Regulation Authority was moved to remind law firms of the approach they should take to client interest. The basic rule is that firms must account to clients for a “fair sum of interest”, but ‘fair’ is not defined.
The argument against suggestions such as this – and levies on City law firms – has in the past been that it was a way for the government to escape its obligation to fund the legal aid scheme properly.
In France, lawyers are not allowed to hold client money – they must use the CARPA, a centralised system run by their local bar association. The aim is to reduce the risk of money laundering, while interest is also forwarded to good causes.
Legal Futures, in association with the SRA, is holding a free webinar on whether solicitors should continue to hold client money. It will be held at 12.30pm on 22 May. Sign up here.
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