Ahead of Wednesday’s budget, an open letter urging prime minister Andy Burnham not to press ahead with plans to seize the interest on client accounts has attracted more than 100 signatures from law firm owners and other solicitors.
The nine-page submission is written by Jade Gani, co-founder of the SME & Boutique Law Firm Alliance, which was created to oppose the Solicitors Regulation Authority’s now-mothballed compliance officer reforms. Gani also threatens legal action by the alliance should the government proceed.
Keir Starmer’s government consulted on an interest on lawyers’ client accounts scheme (ILCA) earlier this year, but the Burnham administration has yet to confirm whether it will go ahead. However, as the Gazette reported in August, the Ministry of Justice has already advertised for two new senior civil servants to implement the plan.
This year’s NatWest Legal Benchmarking Report extrapolated from survey responses that 10% of law firms (900 in total) – many on regional high streets – could go under if ILCA proceeds.
‘The profession is being asked to contemplate a scheme under which government would take 75% of the interest generated on pooled client accounts, while having consulted on taking 90% or even 100%, together with 50% of the interest generated on individual client accounts,’ the letter states. ‘We consider that proposition extraordinary. The justice system is a fundamental public service. Its chronic funding problems cannot fairly or sustainably be addressed by identifying income connected with one heavily regulated group of private businesses and simply diverting it to government.
‘Further, the proposal has been described across the profession as a “stealth tax”, and it is difficult to see it otherwise. Government proposes compulsorily to appropriate a substantial proportion of a financial return generated on client money, not as part of the ordinary taxation system, but through a bespoke scheme applying specifically to users and providers of legal services. Yet fundamental questions remain unanswered as to the legal character of that payment. Is it a tax, a levy, a sequestration of client money, or something else? What is the statutory basis for it, and what safeguards ordinarily associated with the imposition of taxation will apply?’
Gani says the description of retained client account interest as ’unearned’ income is ‘deeply objectionable’. She adds: ‘If government and regulators regard the holding of client money as an activity carrying sufficient risk to justify extensive controls, oversight and compliance costs, they cannot credibly pretend that the economic return generated through that same infrastructure appears from nowhere. Government proposes to take the benefit while leaving private businesses with the work, cost, liability and risk. That is not a partnership with the profession. It is an extraction from it.’
The letter goes on to warn that the ILCA scheme would reverse progress on diversity in the legal profession, reduce access to justice and ‘hollow out the high street’. No scheme should be announced or implemented until government has undertaken and published a ‘robust, transparent and independently scrutinised assessment of its impact on firms of different sizes and practice areas, including the cumulative burden of other regulatory and employment costs’, it says.
The alliance ‘expressly reserves its position as to any legal remedies that may be available should government proceed’ Gani concludes, calling for an urgent meeting with ministers and officials before any final decision is taken.
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