Up to three-quarters of the interest earned on client accounts would be remitted to the government to help fund a ‘sustainable justice system’ under plans unveiled by the government today.
Opening a consultation on the 'interest on lawyers' client accounts scheme’, lord chancellor David Lammy said that ‘unearned income’ should be invested in strengthening the justice system. 'Law firms thrive when the system is strong, so it follows that they should contribute to strengthening justice', he said.
Under the proposals, 50% of the interest generated on individual client accounts would be remitted to the Ministry of Justice Central Acount. The proposed figure for pooled accounts is 75%.
The consultation, on behalf of the MoJ's 'additional funding team', is open for an unusually brief five weeks, closing on 9 February.
The Law Society immediately criticised the plan, saying it would put high street law firms at risk and force legal fees to rise for those that survive.
Society president Mark Evans said: 'The MoJ has decided to take money from the interest earned on law firms’ client accounts to boost its own budget. Yet, as its own consultation reveals, it has no clear idea how this proposal will work in practice and no understanding of the serious consequences this will have on high street firms and access to justice throughout England and Wales. Firms will close, fees will rise and clients will be impacted if the MoJ goes ahead with the proposal.'
The consultation document notes that, at present, client funds are subject to Solicitors Regulation Authority rules under which firms must account to clients for a 'fair sum' of interest earned. The MoJ proposes that the new scheme would apply to 'funds held in all client accounts pursuant to activities undertaken by legal services providers in England and Wales who are regulated under the Legal Services Act 2007'.
For firms that failed to comply, 'appropriate sanctions, to be set out at a later date, would be in place'. The whole scheme would be administered by the Ministry of Justice - an approach which 'ensures timely implementation and minimises unecessary complexity and cost to the public purse'.
Alongside the consultation document, the MoJ published research showing that while firms are 'generally committed' to returning client account interest to their clients, 'there are wide variations between firms in how much is paid back and how that amount is determined'. It also found that 92% of firms said they are 'not at all or not very reliant' on client interest.
It emerged last July that the Ministry of Justice was eyeing firms’ client account interest when legal aid lawyers were invited to roundtable discussions on the possibility of an 'Interest on Lawyer’s Client Account' scheme. The consultation document notes that the first such scheme emerged in France in 1957 and has since been emulated in Australian states, the US and Canada.
The Gazette understands that consultation responses are likely to raise concerns about any need for legislation to implement the scheme, the impact on legal aid firms, and the additional burden on firms having to divide interest receipts between the client and the ILCA scheme.
The Conveyancing Association also attacked the proposals. Nicky Heathcote, non-executive chair, said: 'Client account interest is not a spare source of funding that can be taken without consequence. For many firms, this income helps cover the real and rising costs of running compliant client accounts, including banking charges, systems, audits and controls that protect consumers. Removing or redirecting that income risks pushing costs back onto clients or making some conveyancing service models unworkable.'
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