In depth: Lammy's plan to seize client account interest faces bitter opposition

Lord chancellor David Lammy cannot have been naive enough to think the legal profession would do anything other than question his plan to divert interest from client accounts to his own department. But perhaps even he will have been surprised by the strength of feeling that has greeted the Ministry of Justice’s proposal to swipe 50% of the interest generated on individual client accounts, and 75% on pooled client accounts, and remit them into MoJ funds.

How else to explain why the consultation on the Interest on Lawyers’ Client Accounts (ILCA) scheme was quietly extended by a month this week to a new deadline of 9 March?

The extra time is unlikely to unearth many in the legal profession who agree with the plan as it stands.

Objections range from the practical to the ethical. Where exactly is the money destined to go? What happens when interest rates fall and the MoJ’s new cash cow runs dry? Is it justified to require the legal profession to fill funding gaps in government coffers – and why are other professions not required to make similar contributions to the systems on which they rely?

'The government have not explained how much money they expect the ILCA scheme to generate and have not guaranteed the money will go back into the legal system, as it is expected to go into the MoJ’s general budget' 

Mark Evans, president, the Law Society

The profession also questions whether the government understands how the sector works. Ministers appear to assume that client account interest is a windfall for law firms, and while there is no question that some businesses benefit from this income stream, the extent to which this is a lucrative revenue line is hotly disputed. Moreover, what are firms supposed to do about the costs associated with holding client money?

Initial opposition tended to focus on how the plan basically amounts to a ‘stealth tax’, but technical issues have been a feature of the responses that came in before the revised deadline.

Law Society president Mark Evans said the plan is flawed and poorly evidenced. ‘The government have not explained how much money they expect the ILCA scheme to generate and have not guaranteed the money will go back into the legal system, as it is expected to go into the MoJ’s general budget,’ he said.

‘The proposals would have serious consequences for access to justice, with firms having to find ways to manage additional costs created by the scheme. Some clients will ultimately have to pay higher legal fees, and law firms may no longer be able to offer some services, including legal aid, affecting vulnerable clients.’

Additional burdens

The Conveyancing Association rejected the notion that client account interest constitutes an unearned surplus or windfall, stressing: ‘For many conveyancing practices, this income contributes directly to meeting the substantial and rising costs of operating a law firm generally, and compliant client accounts in particular, including banking charges, specialist accounting systems, external audits, internal controls, and fraud prevention measures that exist primarily to protect consumers.’

Surrey Law Society’s response highlighted that small and medium-sized firms will struggle with the administrative burden the scheme will impose. Its members also raised concerns about the impact on clients, including how the changes would be explained and the fact that clients do not appear to have been directly consulted.

The group added: ‘Only a very small minority of members identified circumstances in which significant interest is typically generated. Overall, interest earned on individual client balances was described as modest and inconsistent, rather than substantial or predictable.’

Even the not-for-profit sector, which might be assumed to support a justice funding boost, is sceptical. Professor Linda Mulcahy told the House of Commons justice select committee this week that she could not see anyone from the sector supporting the scheme as it is currently designed.

Mulcahy, currently leading a two-year project exploring ‘mixed’ funding models to support free and early legal advice, said: ‘The fact that there are no named beneficiaries means we all worry the civil justice system is once again cross-subsidising prisons and the criminal justice system, which has happened repeatedly over a 30- to 40-year period.’

Comparisons with other jurisdictions, which maintain notionally similar schemes, were misplaced, Mulcahy said. These tend to involve an independent foundation which receives and allocates the income.

Lammy was clear when he introduced the proposal that law firms benefiting from a strong legal system should contribute to strengthening it. But he also said he was committed to working with the sector to ensure the approach taken is proportionate. Based on the first batch of consultation responses – which will no doubt be followed by further resistance before the extended deadline – he should not expect much help.