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Secretary of State for Justice David Lammy was accused of a “brazen attempt” to “confiscate law firms’ cash” after the government revealed plans to take the interest law firms earn on money sitting in their client accounts.
Earlier this month, the Ministry of Justice opened a consultation on a proposal to introduce an Interest on Lawyers’ Client Account Scheme (ILCA).
Speaking in the foreword, the Lord Chancellor, Lammy, said this was “a way for the legal sector to contribute more to the justice system it relies on,” adding, “law firms thrive when the system is strong.”
Under the government’s proposal, a proportion of the interest earned on lawyers’ client accounts in England and Wales, including third-party managed accounts, would be remitted to the government. The government is also considering whether individual client accounts should be included within the scheme’s scope to avoid creating a loophole.
Law firms earn substantial income from interest on client accounts, a revenue stream that significantly boosted profits during recent periods of high interest rates, with UK firms generating over £350m in 2024 alone, according to data from Taha & Co.
Potential harms to the sector
However, the government’s proposal has prompted law firms to warn that the plans risk damaging the sector, especially mid-tier firms. Nick Leale, partner at CM Murray, noted, “The removal of that income will inevitably lead to reduced investment and reduced openings for promotion to partnership.”
Hywel Pegler, head of professional and business services at RSM UK, stated that this proposal “could have a significant impact on firms that have historically generated large associated interest income from clients’ money held.”
“To address this potential shortfall, firms may need to increase prices and reconsider their capital and banking arrangements. It could even lead to the closure of some high-street firms that are unable to sufficiently absorb the cost of these changes,” he explained.
The Law Society believes that if this goes ahead, firms will close, fees will rise, and clients will be impacted. “We’ll be responding to the consultation, and we need to hear from our members,” stated Mark Evans, president of the Law Society.
Years of underfunding in justice system
The scale of the crisis in the criminal justice system is Lammy’s sole focus, resulting in his proposal to scrap some jury trials to tackle the backlog, a plan that has faced widespread condemnation.
