Law firms disproportionately nourished by interest on client money must ‘wean themselves off’ that bountiful teat.
I paraphrase, but that was the core message of last year’s Law Society Financial Benchmarking Survey. Total interest receipts soared 150% from £28m in 2023 to £69.5m a year later, an average of nearly £500,000 for each firm which participated in the research.
The survey’s advice now seems prescient; and not just because such windfalls are diminishing as interest rates come down again. The government this week revealed that it plans to cream off up to three-quarters of this ‘unearned’ cash to help prop up our ailing justice system. A consultation period of just five weeks suggests ministers are disinclined to brook any argument.
Placed into context, Wednesday’s announcement is not a massive surprise. In its November 2024 consultation on consumer protection, the SRA declared that law firms should not be able to profit from holding money on clients’ behalf and said it was considering a change in the rules to prevent this. Clients should instead receive all the interest on their money, said the regulator.
Did the Ministry of Justice have a word? I suggested as much a few weeks ago when the SRA announced that it was booting the vexed issue of the client account into the long grass. We knew then that the department was looking at siphoning off the interest to ease funding pressures. What we did not know, however, was that chancellor Rachel Reeves would abandon her well-trailed plan to close the fiscal ‘loophole’ created by treating LLP members as self-employed for national insurance purposes.
Now it all makes some sort of sense. We can’t hammer the lawyers with a double-whammy, ministers and mandarins may have concluded. A single whammy will do.
What is being condemned as a ‘backdoor tax raid’ certainly fits that description and it may well not be shroud-waving to suggest that some law firms could go under. Some suggest as many as one in 10, which would amount to hundreds. The stakes are high. Whoever steps up to speak for clients, meanwhile, will argue – like the SRA – that neither solicitors nor ministers have a legitimate claim on money which ought properly to be disbursed to them. Expect 35 days of fevered lobbying.
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