High Street law firms are likely to be disproportionately hit by controversial proposals for the government to seize interest on client accounts.
The warning comes as representative groups also questioned the presumption that firms are making any significant gains from the interest generated on client money.
The government has moved the deadline for submissions to its Interest on Lawyers’ Client Accounts (ILCA) consultation to 9 March, after being told that the initial four-week period was not long enough for considered responses.
The closing date was initially 9 February, and the responses that came in advance of this deadline unanimously opposed the plan, which is 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%.
The Law Society said this week the scheme is ‘flawed, sets a damaging precedent and conflicts with wider government commitments on growth’. Society president Mark Evans added: ‘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.’
Evans also pointed out that solicitors already make a significant contribution to the justice system through income and business taxes, and warned against the precedent of requiring industries to plug general budget shortfalls.
Surrey Law Society’s response highlighted that small and medium-sized firms will struggle with the administrative burden the scheme will place on them. Its members also raised concerns about the impact on clients, including how the changes would be explained in practice and the fact that clients do not appear to have been directly consulted.
The organisation also pushed back against the assumption that firms were effectively propping themselves up with the income generated by client interest.
Interest generated on a single client’s funds is generally ‘small or negligible’, whether held in pooled or individual client accounts, and reflects the short-term and variable nature of most client money holdings. What money the interest did generate was commonly used to offset the costs and risks associated with holding and administering client, money, rather than turning into a material revenue stream.
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.’
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