Controversial proposals unveiled by the Ministry of Justice to seize the interest on client accounts could send hundreds of law firms to the wall.

That was the warning delivered yesterday by one legal business specialist, as the proposals were slammed as counterproductive and unworkable. The Law Society cautioned that the plan would put high street firms at risk and trigger a sharp rise in legal fees at those that survive. Conveyancing firms are considered to be especially vulnerable.

Opening a consultation on the ‘interest on lawyers’ client accounts scheme’, lord chancellor David Lammy said on Wednesday 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 added.

Under the proposals, 50% of the interest generated on individual client accounts would be remitted to the Ministry of Justice Central Account. The proposed figure for pooled accounts is 75%.

The sums in issue are large. Data submitted to the Solicitors Regulation Authority’s consultation on consumer protection last year suggested that between 5% and 10% of UK law firms (about 900 at the upper estimate) will suffer either ‘financial failure or serious financial consequences’ without the uplift from client receipts. In at least 5% of firms more than 80% of profits arose from interest income in 2024, the data suggested.

Last year’s Law Society Financial Benchmarking Survey revealed that total interest receipts had soared to an average of £500,000 per firm (Leader, p3.)

Andrew Allen, partner and head of legal sector at chartered accountants PKF Francis Clark, and chair of the survey working group, described Lammy’s plan as a ‘backdoor tax raid’ that would increase fees and cost jobs. He told the Gazette: ‘NatWest’s own benchmarking survey in 2025 told us that for 50% of law firms, interest profits represented at least 21% of their profits, and for 25% of firms it represented over 35% of their profits. For up to 10% of UK law firms, interest income represented over 50% of their profits.

‘If this scheme is introduced, it will most likely result in law firms failing financially, in turn causing hardship and disruption to both consumers and employees. It will also probably place an unmanageable burden on the SRA as a regulator, which will be required to intervene in a high number of firms to protect consumer interests (including matter continuation and client funds at risk).’

Allen also predicts that firms will seek to enter arrangements with banks to avoid earning interest on client funds. In lieu of such interest, they will instead receive favourable banking charges and interest on their own borrowings, rendering the proposals ‘pointless in raising revenue’.

Critics have also highlighted the fact that the MoJ will receive the money into its central account. The cash will not be hypothecated for specific projects, as in other jurisdictions that operate such schemes.

Under the current SRA Accounts Rules, clients are entitled to a ‘fair’ rate of interest on their money. The regulator has said previously that it can see no good reason why clients should not get all the interest.

 

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