Government proposals to recover client account interest from law firms to fund the justice system will add extra costs and force clients to seek out unregulated providers.
That was the verdict of Birmingham Law Society (BLS), which today responded to the Ministry of Justice’s consultation on plans unveiled earlier this month.
Cary Whitmarsh, chair of the society’s professional regulation committee, said the scheme was ‘nothing more than a stealth tax on legal services’ imposing a new regulatory burden on law firms.
‘There will be the cost of compliance by law firms and the costs of the scheme administrator,’ said Whitmarsh. ‘Those costs are certain to fall on legal service providers. This will make legal services more expensive to consumers and other clients. It seems likely that these increased costs will reduce access to justice rather than improve such access.
‘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.’
Whitmarsh said the committee had also identified unintended consequences of the proposal to remit 50% of the interest generated on individual client accounts to the Ministry of Justice central account (the proposed figure for pooled accounts is 75%).
International clients would consider alternative jurisdictions, particularly for cross-border litigation, where the cost of doing business was more attractive, which would in turn hamper the growth of legal services provision and damage the reputation of the legal profession of England and Wales.
Those who have been awarded a lifetime care settlement following a catastrophic personal injury would also be adversely affected as law firms would have to account to the MoJ for 50% of the interest earned on their settlement.
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Accountancy firm PKF Francis Clark said in its consultation response that the plans could threaten the futures of high street firms, who are most likely to offer services such as conveyancing, probate and private client advice which would be subject to the client account interest rules. It added that many firms delivering public-funded legal services rely on the cross-subsidy from client interest income to make these services viable.
The firm, which works with around 200 law practices each year, said that for half of firms interest income represented between 9% and 35% of their profits and for most firms it represents at least 20% of their profits.
The response added: ‘It feels inevitable that ILCAS would result in a significant increase in the instances of financial failures in the legal sector. Whenever financial failures arise in the legal sector client funds are placed at a higher risk.
‘This statement is consistent with studies issued by various legal regulators over several decades. With financial failure comes the need for regulatory intervention to protect the continuation of client matters and protect client funds. This naturally creates additional costs which ultimately would be suffered by consumers in higher prices.’
Lord chancellor David Lammy has said that ‘unearned income’ should be invested in strengthening the justice system, arguing that law firms thrive when the system is strong, so it follows that they should contribute to strengthening justice.
The consultation closes on 9 February.
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